Tax rises or spending cuts: What might be in the Spring Statement?

The Spring Statement was supposed to be a non-event – at least that’s no doubt what the Government was hoping back in the summer of 2024. As winter turns to spring in 2025, that’s looking like a forlorn hope. 
 
Tight fiscal boundaries, mounting pressures on the public purse, geo-political upheaval and a stumbling economy are all combining to make life difficult for Chancellor of the Exchequer Rachel Reeves – and to fuel speculation that some sort of revenue-raising measure could be announced on 26 March, despite rumblings of discontent among UK businesses and households. 
 
Jason Hollands, managing director at leading UK wealth management firm Evelyn Partners, says: 
 
‘On taking office, the Chancellor indicated that the Government would hold just one Budget a year in the Autumn, where tax policy would be set, and the upcoming Spring Statement was supposed to be a formality - an update on the public finances alongside the Office for Budget Responsibility’s latest economic outlook. In principle, the Spring Statement should not therefore see any changes to tax policy, especially given that most of the measures announced in Rachel Reeves’ October Budget have yet to come into force.  
 
‘The Government will be working hard to avoid a major tax announcement on 26 March, not least because coming back to the table with more tax hikes before the previous measures have even been implemented would send a signal that the Chancellor has lost control. However, the feeling that the Spring Statement might effectively become a mini-Budget can’t be ignored.  
 
‘Underlying these difficulties is an economy that has stalled since the Chancellor’s 30 October inaugural Budget, with businesses reacting negatively to the tax raising measures and consumer sentiment taking a dive. Slower than hoped for growth threatens to weaken tax receipts and government borrowing costs have also risen. The combined effect of lower tax receipts and rising borrowing costs will be a shrinking of the Chancellor’s fiscal headroom, which was already narrow at £10 billion at the time of the Budget. In addition to this, resurgent inflation is going to put pressure on wage demands.  
 
‘In the medium to long term, the defence spending question could well become more troublesome: the Prime Minister’s announced increases are being covered by cuts to the foreign aid budget and an opening up of the National Wealth Fund but that is probably not the end of the story. 
 
‘With limited scope for increasing borrowings beyond her existing plans, the Chancellor will sooner or later face the stark choice of either further tax rises or spending cuts.’ 
 
What could be in the Spring Statement? 
 
Hollands says: ‘It is currently more likely that we will see spending cuts rather than tax rises. The Chancellor should be well aware that the tax measures announced at the October Budget have had a chilling effect on the economy, especially the rise in employer National Insurance contributions. With businesses now facing the threat of US tariffs, more tax rises would be very damaging. The Government is also boxed in by Labour’s manifesto pledges not to raise income tax, NI, VAT or corporation tax.  
  
‘If we see any moves on tax, watch out for a further extension to the freeze on personal allowances and thresholds beyond 2028. The multi-year freeze on allowances, such as the annual tax-free Personal Allowance and the threshold at which higher rate tax is paid, is a form of stealth tax that operates by fiscal drag – the process by which millions more people are pulled into the higher rates of tax as wages rise over time. This is even expected, over the next couple of years, to see recipients of the State Pension pay income tax even if they don't have any other income, as the pension payout rises with the triple lock formula while the Personal Allowance remains frozen. 
  
‘The freeze on allowances and thresholds – begun by the Conservative government when Rishi Sunak announced it as Chancellor in 2021 – and the cut to the additional rate threshold in April 2023 have massively increased the tax burden in recent years, but without the headline-grabbing negative publicity that a formal increase in the rates of tax would have attracted. And in fact the freezes have been a more powerful measure in terms of raising tax revenues than a couple of pence on the basic rate of income tax would have been. 
 
‘It isn’t just income tax allowances that are frozen: the nil rate band for inheritance tax has not moved from £325,000 for 15 years and will remain there until at least 2030. That means the sort of households for whom IHT would have been a very remote notion just 10 years ago are now being drawn into the tax. The Treasury’s IHT take will also be boosted significantly by the inclusion of pension assets in estates from April 2027, which the Chancellor announced in October. 
 
‘Likewise, capital gains tax and dividend allowances have been cut to meagre levels and the personal savings allowances have also remained frozen, drawing many savers and investors into paying tax on their interest and investment returns and potentially hindering investment decisions.
 
‘While further direct tax-increasing moves might be unlikely this month, the Spring Statement could see the announcement of reviews and consultations on tax reforms and “simplification” proposals that might result in changes at the next full Budget. One such area could be an overhaul of the gifting regime.  
 
‘Currently there are a patchwork of different allowances enabling people to make gifts that are immediately exempt from their estate for IHT purposes, but ultimately any significant gift is a Potentially Exempt Transfer, which means it will leave the estate and be exempt from IHT if the person who makes it lives for seven years or more. Given the Chancellor’s clampdown on inheritances at the Budget - when as well as the pensions measure, the amount of relief businesses and farming families could claim against IHT was slashed - next on her hit list could be the gifting regime.  
 
‘Under the auspices of “simplifying” this, we could see fewer options for enabling people to pass wealth on during their lives to mitigate IHT. There is an almost irresistible urge for the Government to do this, as already we are seeing many clients draw money from pensions, which they had originally planned to leave untouched for IHT purposes, and instead make lifetime gifts to their children and grandchildren.’ 
  
Will it be ‘back to the future’ for ISAs? 

Hollands says: ‘Many savers have been getting twitchy in recent weeks with a steady drip of speculation that the Chancellor could overhaul ISA rules this year. While it seems unlikely this would occur at the Spring Statement, unless Rachel Reeves puts it to bed it’s an issue that is likely to rumble on until the next Budget.

‘As some asset managers and City brokers have been busy lobbying for measures to divert more investment funds into UK equities, the speculation has grown that the Chancellor is listening and could look to restrict the amount of cash going into ISAs, nudging savers towards investing instead.

‘It seems very unlikely that cash ISAs would be scrapped entirely. However, capping them as a proportion of the current allowance is a credible threat and would essentially turn the clock back by a decade, as prior to 1 July 2014 the proportion of the ISA allowance that could be held in cash was limited to 50% of the overall allowance.  
 
‘While it is undoubtedly true that too many people keep excess savings in cash and could be missing out on the higher long-term returns that can be achieved from investing, anything that reduces choice and flexibility is a step backward. For some people, investing will simply be too risky and so a reduction in cash ISA limits will just end up exposing more of their savings to tax in standard savings accounts – particularly with the personal allowances frozen and dwindling in real terms. And don’t forget that additional rate taxpayers have no PSA at all, so their options to keep cash savings tax-efficiently could be closed off. 
 
‘The key question is at what level a cap might be set. An annual cash limit of £10k for instance would not impact many cash ISA savers. 
 
'There should also be a wider concern. If you follow the argument through that City firms have been encouraging the Chancellor to curtail cash ISAs to drive more cash to boost economic investment (rather than specifically achieving better returns for the saver), then it begs the question as to what Rachel Reeves might be thinking about Stocks & Shares ISAs as well? After all, the current Government’s interventionist logic might lead it to conclude that tax incentives should be used to encourage investment into UK markets, not US or overseas businesses like NVIDIA, Apple and Tesla.  
 
‘The flawed idea of an extra “British ISA” might have been abandoned, but the arguments for it have opened a Pandora’s Box: a risk now is that the core ISA allowance could be reshaped to fulfil a similar objective instead.  
 
‘As with limits on cash in ISAs, could we see a “back to the future” move at some point where Stocks & Shares ISAs are required to invest primarily or partially in UK equities? Personal Equity Plans, the predecessors of ISAs, were originally restricted to UK equities and then a limited ability to invest 25% of the allowance overseas in “non-qualifying” investments was introduced before full flexibility was granted.  
 
‘Any narrowing of the range of investments that can be held in ISAs might be cheered on by those hoping to boost interest in the UK stock market, but it would be bad news for the investing public.’