UK May Raise Basic Income Tax Rate to 25%?! Private School Parents Face HMRC Back-Tax Warning! Interest Rates Fall to Lowest Level in Over Two Years
- TBA
- Aug 11
- 5 min read
Rachel Reeves needs to put up taxes to cover £40bn deficit
The UK’s National Institute of Economic and Social Research (NIESR) recently released its latest report, stating that, due to slowing economic growth and persistently high inflation, the UK government’s fiscal shortfall is now estimated to have exceeded £40 billion. To close this gap, Chancellor Rachel Reeves is likely to have little choice but to raise multiple taxes in the Autumn Budget, especially after reversing welfare cut policies.
This forecast could break Labour’s general election manifesto pledge not to balance the books by raising personal income tax.
According to NIESR’s calculations, to fill the current £41.2 billion deficit and restore a fiscal buffer of nearly £10 billion, the Treasury would need to raise more than £51 billion in extra revenue. In reality, the options are limited—either raise taxes, cut spending, or increase borrowing. Since borrowing could undermine market confidence and government departments are already under severe strain, tax hikes are seen as the most likely route.
NIESR stated that increasing both the basic and higher rates of income tax by 5 pence per pound (equivalent to 5 percentage points) could fill the budget gap. Other measures under discussion include extending the freeze on personal income tax thresholds and lowering the tax-free allowance for cash ISAs.
Freezing tax thresholds could raise around £8 billion.
Raising the basic rate to 25% and the higher rate to 45% could completely eliminate the shortfall.
NIESR senior economist Stephen Millard noted: “If the Chancellor wants to maintain a £9.9 billion buffer, she will need to find £51 billion in new revenue or savings every year by 2029–30.”
Last month, the Chancellor already hinted that, due to the removal of welfare restrictions, the government would have to raise taxes, though she did not specify which ones.
Meanwhile, public sector pay demands are growing louder, and spending pressures in immigration, justice, defence, and education continue to mount. Labour backbenchers—especially after successfully blocking cuts to the winter fuel allowance and disability benefits—are expected to oppose reductions to other promised public spending in the Budget.
The Office for Budget Responsibility (OBR) had forecast in March that the fiscal deficit would fall in 2025–26, but the latest official figures show that in just the first three months of this financial year the deficit reached £44.5 billion, £5 billion higher than expected.
With weak economic growth, stubborn inflation, and rising public spending pressures, the UK’s public finances face tough choices. Conservative spokesperson Mel Stride criticised Labour for “mismanagement” and for “always relying on tax hikes because they don’t understand the economy.” Reeves will face the challenge of balancing fiscal discipline with election pledges in the Autumn Budget.
HMRC could claw back VAT from private school advance fee schemes
According to multiple UK media reports, HM Revenue & Customs (HMRC) is considering reclaiming taxes from parents of private school pupils who used “advance payment” schemes to avoid paying Value Added Tax (VAT). Statistics show that in just the past year, such arrangements brought in over £500 million in prepayments for the UK’s top private schools.
An analysis by The Telegraph found that many wealthy families, before January 2024, paid several years’ worth of tuition fees upfront to avoid the 20% VAT introduced under Labour’s new policy. During the election campaign, Labour had clearly stated in its manifesto that it would impose VAT on private school fees, and the policy was formally announced by the Treasury on 29 July 2024.
Prestigious private schools, including Winchester College and Eton College, strongly encouraged parents to use this scheme before the policy took effect, triggering a “payment rush.”
Brighton College: received £50 million in prepayments last year, compared with £60 million in total annual tuition fee income.
Eton College: collected nearly £53 million in advance fees.
Annual boarding fees (including VAT) at both schools are around £63,000. The government has said that removing tax breaks for private schools is expected to raise £1.8 billion annually by the 2029–30 academic year, funding the recruitment of 6,500 new teachers and improving the quality of state education (state schools currently educate 94% of UK pupils).
However, tax lawyers have warned that these advance payment schemes carry significant legal risks. Many schools treat parents’ prepayments as “deposits,” deducting the annual fees from them year by year.
From a VAT perspective, however, the tax point is usually set when the fees for each academic year are invoiced. If, at the time of payment, the price and service period were not explicitly fixed, HMRC could still demand backdated VAT in the coming years. This means that parents who have already paid hundreds of thousands of pounds could still receive tax repayment notices years later.
Interest rate cut to lowest level in more than two years
Last week, the Bank of England announced a 0.25 percentage point cut to its base interest rate, bringing it down to 4% — the lowest level in more than two years. This marks the third rate cut this year and the fifth adjustment since last year’s peak of 5.25%.
Despite a recent rebound in UK inflation and continued rises in energy and food prices, the Bank made what it called a “difficult and delicate” decision. Governor Andrew Bailey said: “We chose to cut rates today, but this was a carefully balanced decision. Rates remain on a downward path, but every step in the future must be cautious and gradual.”
For the general public, the base rate directly affects the cost of mortgages, consumer loans, and other borrowing:
Mortgages: Several lenders have already reduced rates ahead of the announcement, with some products now below 4%. For those whose fixed-rate mortgages are about to expire, this is undoubtedly good news.
Variable-rate mortgages: Industry data shows the average monthly repayment will fall by about £29.
Savings: Deposit rates will also decline, and savings returns are expected to shrink in the coming weeks.
The Bank still has three more policy meetings this year to discuss rates. While the Governor has hinted that further cuts are possible, he stressed that the outlook remains “uncertain.” Markets broadly expect the next cut to come at the November meeting. Forecasts suggest that by 2026, the base rate could fall to 3.5%.
Meanwhile, inflationary pressures persist. In June, the UK’s Consumer Prices Index (CPI) rose to 3.6%, an 18-month high. The Bank projects inflation will climb further to around 4% in September; food inflation, currently at 4.5%, could rise to 5.5% before Christmas. However, the Bank expects inflation to slow in the fourth quarter of this year, drop to an average of 2.5% in 2026, and return to its 2% target by 2027.
On economic growth, the Bank raised its 2025 GDP growth forecast from 1% to 1.25%, offering a short-term boost to the public finances.
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