Will VAT change in the Autumn Budget (2025)?

Chancellor Reeves was recently interviewed about whether she would raise VAT in the upcoming Autumn Budget. Refusing to give a yes/no answer, she instead replied: “The world has changed [since Labour’s initial manifesto pledge in 2024]”.

This raises the uncomfortable question: will the Chancellor raise (or change) VAT in November? If so, what could this look like - and how might this affect households and businesses across the UK? Below, our financial planners share their thoughts.

The Background to the Autumn Budget

For many months now, the media has been widely speculating about imminent tax rises. There are several reasons for this:

• The UK economy has been struggling since the second quarter (Q2) of 2025, with slow GDP growth, rising government borrowing costs, and persistent inflation above the Bank of England’s 2% target.
• Cutting public spending has proven difficult for the government, as shown by its U-turn on the universal Winter Fuel Payment and its watered-down recent welfare bill.
• Numerous think tanks (e.g. including left-leaning ones like NIESR) have highlighted a larger “black hole” in the UK’s public finances compared to this time last year, possibly standing as high as £50bn.

In short, the government is highly constrained in its ability to “correct course” for the economy. It cannot borrow much more, and cutting spending has proven almost politically impossible.

This leaves one main option: raising taxes (called for by numerous Labour MPs). However, the Party is constrained by a key manifesto pledge made before its 2024 general election win:

No tax rises for “working people” - specifically mentioning income tax, National Insurance (NI) and VAT. In other words, the UK’s three biggest sources of tax revenue.

Why VAT is in the Spotlight

VAT is a significant source of revenue for the government, generating £172 billion in 2024-25. This makes it an attractive target for a chancellor considering tax hikes.

The Chancellor has arguably already ventured into this territory by scrapping the VAT exemption for private schools from 1 January 2025. More recently, the Chancellor has refused to rule out any changes to VAT in her recent interview with Good Morning Britain.

Instead, Chancellor Reeves stressed how “harder choices were to come” in the budget. Also, the global context had changed for the UK economy since Labour’s manifesto pledge in 2024 - particularly due to new tariffs, conflicts and rising gilt yields (government borrowing costs).

Here are two possible ways the Chancellor could change VAT whilst claiming to hold true to the letter of Labour’s original manifesto pledge:

• Change the VAT threshold for small businesses (currently £90,000). Right now, it is one of the highest in the OECD. Some analysts speculate that the Chancellor could raise it to encourage entrepreneurship. However, others believe the threshold could fall to as low as £30,000 - potentially dragging small traders, freelancers and others into the VAT net.
• Remove/restrict other VAT exemptions. There is a long list of goods and services that are exempt from VAT (or face a lower rate), such as financial services. It is possible that the Chancellor may change some of these to raise more tax revenues.

What can you do?

At the Labour Party conference, Keir Starmer PM inferred that the full analysis of options needs the next two months leading up to the Autumn Budget, so in short, nobody knows yet.

The uncertainty can be deeply frustrating - especially for SMEs trying to forecast their revenues and obligations. If you are a business owner, now may be a good time to stress-test your cashflows and pricing under alternative VAT scenarios. A financial planner can assist with this.

This may involve preparing your accounting systems and software to accommodate possible changes, such as e-invoicing and digital reporting (especially important in light of the “Making Tax Digital” initiative).

Take a close look at your supply chain, contracts and vendor agreements. How might input VAT recovery be affected by a change in the rules? Do you have options for accelerating or deferring capital expenditure or purchases, if necessary?

For households, bear in mind that any rise in VAT on goods and services could raise your cost of living. So, take another look at your budget and consider how major expenses (energy, food, transport, education) might be affected if they became subject to VAT.

For those in or close to retirement, it can help to run a cashflow model to see what changes you may need to make to maintain the standard of living you have been aiming for. Speak to your adviser to ask them to run this for you.

Invitation

As always, we caution against making major financial decisions based on what “might happen” in the upcoming Autumn Budget. The time-honoured rule is to follow your long-term financial plan, agreed with your adviser. Avoid making knee-jerk, rash decisions fuelled by headlines.

If you’d like to ensure you’re taking the right steps to protect your wealth and safeguard your financial future, please get in touch.

Your capital is at risk. Investments can go down as well as up, and you may not get back the amount you originally invested. Past performance is not indicative of future results. Diversification does not guarantee profits or fully protect against losses. Tax treatment depends on individual circumstances and may change in the future. This content is for information only and does not constitute personal financial advice. Readers should seek independent financial advice before making any investment decisions.