Anyone following the Chancellor’s recent statements will have noticed a familiar theme: there is far less room to manoeuvre than anyone in government might wish to admit.
After a year spent frantically trying to protect public services while keeping borrowing under control, the Treasury’s choices are narrowing fast. The Autumn Budget looks set to test the very limits of both public patience and political capital, as talk turns once again to the simplest and most sweeping sources of income – VAT and National Insurance.
They are the government’s “blunt tools” in this regard, in that they lack precision and acuity, with broader, clumsier reforms tarring everyone with the same brush. Easy to adjust, simple to implement and virtually guaranteed to generate income, it’s easy to see why speculation around this is rife. However, this is also all but guaranteed to affect almost everyone in the country. So, what can we expect?
VAT: The ever-reliable revenue raiser
Value Added Tax, or VAT, is charged on most goods and services in the UK at a standard rate of 20%. It is the single largest source of indirect taxation, contributing around £160 billion to the Exchequer each year.
Raising that rate to 25% has been quietly discussed as one of the few options capable of plugging a significant share of the government’s revenue gap. On paper, it could add tens of billions of pounds to Treasury coffers… but it would do so at a cost. For a start, it would actively contradict their firm election pledge not to raise VAT, National Insurance or income tax during their time in government. In fact, it was a line they repeated persistently and one that will be firmly under the microscope should they prove it to have been a lie.
But, back to the issue at hand: VAT is inherently regressive in that it applies the same percentage to all purchases, regardless of income, meaning those who spend a greater proportion of their earnings on essentials- typically lower and middle-income households- would feel the pinch the most.
The move would also risk damaging consumer confidence just as inflation begins to cool. Retail and hospitality businesses, already absorbing higher costs, would face tough decisions about whether to pass increases on to customers or take the hit themselves. Either outcome slows spending and dampens recovery.
In this sense, a short-term boost to the public balance sheet could therefore come at the expense of long-term economic health.
Extending National Insurance to pensions and property? A new direction for earned income
The other possible lever being discussed is National Insurance (NI). Currently, NI applies only to earned income (i.e. wages and salaries), meaning that individuals who receive most of their income through pensions or property rents do not contribute in the same way as employees.
One suggestion seemingly gaining traction is to extend NI to rental and pension income. Supporters argue this would close a gap in fairness, ensuring that those who benefit from unearned income also contribute to the social systems funded by NI.
However, such a change would represent a major political gamble – one I’m doubtful the government would be willing to bet on. Pensioners have already paid NI throughout their working lives, and again when initially withdrawing their pension, so extending it further into retirement income would feel like triple the taxation. Landlords, too, could view it as an added burden at a time when property costs and regulation are already experiencing diminishing returns in some markets.
A narrowing set of options for a Treasury in trouble
Unless the government can make clear and cumulative progress in addressing the fiscal “black hole” that economists estimate has increased in size by over 50% in the last year (from £22 billion to £50 billion, according to the National Institute of Economic and Social Research (Niesr), I suspect we may see a shift in alliances (and possibly a cabinet reshuffle) before the local elections in May next year.
Whether or not this timeline proves accurate, the underlying reality is clear: the government is running out of easy fiscal wins – which leaves only the difficult choices. As the government looks for funds to fill its estimated multibillion-pound deficit, the temptation to reach for these reliable revenue streams may prove irresistible.
What would be the economic consequences of changing VAT and NI?
In practice, changes to VAT or NI would ripple through the economy. Higher VAT increases the cost of living and a broader NI base raises the cost of earning or drawing income. Both reduce disposable spending power and risk slowing growth at a time when fragile optimism is just returning.
They are, quite simply, instruments of necessity rather than of innovation; fiscal stop-gaps that balance the books but blunt competitiveness.
Preparing for what comes next after the Autumn Budget
Speculation around the Autumn Budget is inevitable, but no outcome is certain until the measures are definitively announced on the day. The most practical step individuals can take now is preparation: reviewing your income streams, assessing your exposure to tax changes and ensuring that your savings and investments remain structured efficiently.
At Matthew Douglas, we help clients anticipate potential shifts and respond with clarity rather than concern.
For clear, level-headed advice on preparing for possible changes to VAT, National Insurance or other taxation, contact us today to speak with one of our advisers.