Autumn Budget 2025 – VAT predictions and possibilities
Last summer, the Labour party pledged in its manifesto not to increase taxes on “working people,” and explicitly mentioned VAT. At the time, the Chancellor indicated that VAT would not be left untouched, and this was demonstrated by their applying VAT to private school fees, despite all the public protests against this change.
We do not expect the Chancellor to raise the standard VAT rate (currently 20%) but we believe on 26 November, she will make a number of pronouncements tinkering with VAT whilst maintaining the appearance of honoring the Labour government’s commitment to voters.
Ahead of the Budget, we outline below, some VAT ‘speculations’ about the changes the Chancellor might look to implement, given the overall intention would be to raise additional revenue from VAT.
Changing the VAT threshold
The Resolution Foundation, a think tank closely linked to the Government, has proposed gradually lowering the VAT threshold from £90,000 to £30,000. They argue this would boost competition among businesses and raise about £2 billion annually by 2029-30. This is in direct contrast to raising the headline VAT rate from 20%.
It is thought that lowering the VAT threshold from £90k could be seen as anti-business – and so the Chancellor could look at freezing it instead. If the VAT threshold was frozen, inflation would gradually push more businesses above the limit, bringing them into the VAT system and increasing tax revenue without explicitly raising taxes.
On the flip side, some budget observers have speculated that the registration threshold might be increased to ease the compliance burden on smaller firms. We however, think this is very unlikely given the intention would be to raise additional revenue.
Cutting/scrapping reduced and zero VAT rates
A reduced VAT rate of 5% applies to a wide range of goods and services, including home energy. Some items, such as children’s clothing and certain essential food and drink products, are subject to a zero rate.
Scrapping or reducing these lower rates could bring in an extra £24 billion (IFS estimate), but full removal would be controversial and inflationary.
A targeted approach, like taxing unhealthy foods, might be more acceptable, with this being described as a way of supporting the NHS.
Sector-specific VAT changes
Groups within the hospitality, retail, and leisure sectors are advocating VAT reductions to help alleviate inflationary pressures, rising costs, and increased competition. Potential measures could include reduced VAT on specific services, such as food served in pubs.
Although previously ruled out by the Health Secretary, Wes Streeting, the government may introduce a VAT charge on private healthcare. The former Labour leader, Lord Kinnock recently suggested taxing private healthcare to fund the NHS, potentially raising £2 billion.
Any support in this area would be strongly welcomed by clients in the hospitality industry, but the likelihood of such changes depends on the availability of fiscal headroom, which remains limited.
The government may introduce a 20% VAT on PHV journeys (dubbed the ‘taxi tax’), hitting private hire operators (PHO) but not traditional taxi drivers. This shift could substantially affect PHV pricing and the cost structures for operators, as PHOs may need to either absorb the additional 20% VAT or pass the cost on to passengers.
Removing of VAT exemption for gambling
Currently, the gambling sector enjoys exemption from VAT, and suffer a range of different gambling taxes, including a 21% levy on online gambling. Some MPs want higher taxes on the industry, and the Institute for Public Policy Research has suggested pushing some rates up to 50% to raise an estimated £3bn.
Reducing domestic fuel VAT from 5% to 0%
With the aim of supporting households facing high energy costs and wider inflation challenges, the Chancellor is reportedly contemplating removing the 5% VAT from domestic fuel bills. This could save the average household £86 per year but would cost the Treasury £2.2 billion annually and benefit all income groups equally.
Tightening compliance and administrative changes
Since the Government is already consulting on digitalisation initiatives such as e-invoicing and online marketplaces, it is likely that proposals will emerge to strengthen tax administration.
This may include closing loopholes, enhancing VAT reporting, and possibly introducing more frequent or real-time data submission requirements. These changes could affect all businesses, potentially requiring them to invest substantial resources to ensure compliance.
Final thoughts
While raising the headline VAT rate seems unlikely, we anticipate that the Autumn Budget will bring significant changes through threshold adjustments, removal of exemptions, or targeted reliefs.
With fiscal pressures mounting and political promises in play, the Chancellor will need to strike a careful balance between raising revenue and supporting growth.
Businesses should stay alert to any VAT announcements and be prepared to adapt quickly.
If you’d like to discuss how potential VAT changes could impact your business and would like to discuss any of the points mentioned above further, please get in touch with our VAT team.