Could Rachel Reeves initiate a tax assault on the affluent, and what could be the potential mechanisms?

The big question looming after the government's Spending Review is whether hoped-for growth doesn't materialize, will taxes have to skyrocket soon?

If that's the case, Rachel Reeves is likely to take aim at the wealthier classes in an effort to balance the books.

Her recent u-turn on winter fuel payments and increased defense spending will need to be paid for. But the Chancellor has left herself with little wiggle room thanks to her iron-clad fiscal rules.

Most economists and think tanks believe tax hikes in the Autumn Budget are now inevitable.

Campers are clamoring for a wealth tax to pay for increased spending, but given its limited impact, it's unlikely to happen.

Reeves has ruled out taxes on the working class, including income tax, National Insurance for employees, VAT, and corporation tax. Instead, she may indirectly impose taxes on the wealthy, despite their protests that they already pay their fair share.

Pensions

Pensions are a significant source of personal wealth, and there was plenty of speculation before the last budget that the Government would impose changes.

While Reeves did not go as far as some experts feared in dragging unused pension assets into the inheritance tax net in April 2027, she may meddle with pensions again in this year's budget.

HMRC recently announced a consultation on salary sacrifice - when people forgo a pay raise or bonus and add to their pension instead, which helps avoid higher marginal tax rates. This has prompted speculation that the Government might introduce a cap on the amount of salary sacrifice that people can use.

There is also ongoing speculation about the reintroduction of the pensions lifetime allowance (LTA), which Labor pledged to reintroduce before dropping it at the election. This was mainly due to the issues that came with the LTA and those with large NHS pensions. The higher tax charges meant more doctors and consultants were opting for early retirement, which deterred them from taking on extra work.

Jason Hollands of Evelyn Partners thinks resurrecting the LTA, or a new allowance with a carve-out for doctors, is unlikely. Instead, Reeves may look at how much tax-free cash can be taken from pensions, possibly lowering the cap from the current level of £268,275 to £100,000.

Inheritance

The Chancellor has already indicated she's keen to limit the amount families can inherit tax-free.

In the Autumn Budget, she capped the availability of Business Relief and Agricultural Relief, and halved the relief available on Aim shares. Most significantly, the Government announced plans to bring pensions into the scope of inheritance tax (IHT) from 2027.

This may add tens or even hundreds of thousands of pounds more in tax to middle-class families. In response to these changes, advisers say more families are using lifetime gifts to mitigate the impact of these changes, namely the £3,000 annual gifting allowance and unlimited individual small gifts of up to £250 per person.

Hollands thinks the Chancellor might overhaul the gifting regime to combat those handing over substantial gifts to reduce their family's IHT bill.

"The now-defunct Office of Tax Simplification came up with a set of such proposals in 2019, which could provide a blueprint or starting point," he says.

"But the elements of a new gifting regime could involve sweeping away all of the current allowances and replacing these with a single lifetime gifting allowance. Or alternatively, extending the seven-year rule to a longer period, such as ten years."

Fairchild also points to possible changes to holdover relief on capital gains tax (CGT), which allows people to defer paying tax when passing on certain assets, including rental properties, into a trust.

"If the government wants to discourage wealth transfer down generations without any tax being payable (whether that be CGT, inheritance tax (IHT) and/or even a future wealth tax), it could consider removing the option to make holdover elections and/or include the value of the shares being gifted in some form of cumulative 'pot' of lifetime gifts, which either results in IHT becoming payable during lifetime or upon death."

Capital Gains

Reeves had the very wealthy in her sights when she hiked the capital gains tax (CGT) rates in last year's budget.

The tax, which is levied on profits from assets ranging from shares to second homes, increased from 10 to 18 percent for basic rate taxpayers. Higher-rate taxpayers now pay 24 percent, up from 20 percent previously.

"This increase was less than many had expected," says Pete Fairchild, national head of private clients at Crowe. "With some lobbying groups calling for CGT to be aligned with income tax rates, further increases - or even broader CGT reform - could be on the government's agenda."

One final lever Reeves may use to raise taxes is keeping income tax thresholds at their current level. The freeze on thresholds since 2021 has created a huge stealth tax raid in recent years and brought in large sums for the Treasury. The frozen basic rate threshold, currently £12,570, drags more people into paying income tax, and means that the real value - adjusted for inflation - of the tax-free allowance has been diminished.

Stalling the higher rate threshold at £50,270 has shifted more people and a greater slice of earnings into the 40 percent bracket. Recent figures from HMRC show that the number of higher-rate taxpayers jumped 15 percent between 2021/22 and 2022/23, and this number is only set to rise.

Reeves could still honor her commitment to keeping income tax at the same level but push more people into paying more tax.

"The pain would gradually build over time, but people would not see an immediate impact on their monthly payslips, and such a measure would technically not breach the pledge to increase tax 'rates' in the manifesto, but achieve the same impact," says Hollands. "Were the Chancellor inclined to act at a faster and more targeted pace, she might reduce the threshold on the 45 percent additional tax band from £125,140 to, say, £100,000, which would strictly speaking not increase 'the rate' of tax as per the pledge in the manifesto, but achieve the same impact."