The increase in fiscal drag and national insurance in April 2025 means taxes as the proportion of gross domestic product rises to another record of 37.7% for the 2027/28 tax year.
Independent groups, which are scrutinizing government spending plans, have released their comments in the wake of the government’s spring statement.
Why are taxes rising in the UK?
Despite today’s tweaks, the government’s existing plans mean that record-breaking taxes will already be reached during the period the government is projecting, OBR said.
“Tax as a share of GDP has risen from 35.3% this year to a historic high of 37.7% for 2027/28, with the remaining forecasts predicting to remain at a high level,” the document states.
“The rapid increase in forecasts for 2025/26 is due to an increase in the fall 2024 budget for employer national insurance contributions effective in April 2024 and the expected recovery in capital tax receipts.
“The further rise in tax forecasts for 2027/28 is primarily due to increased nominal revenue combined with the frozen tax threshold,” added the concept that arises called “fiscal resistance,” which arises when wages rise, despite the frozen threshold for wage increases.
In the fall budget, the Prime Minister confirmed that income tax standards are covered in line with inflation from 2028 to 2029, which was frozen by the previous government in 2022. By this point, more people will be “drug” into higher tax rates and additional tax bands.
“The absence of further tax systems today should provide only limited comfort as the tax burden is ratcheting from here,” says Jason Holland, managing director of wealth manager Evelyn Partners.
These include changes to CGT, IHT and VAT already introduced by the Labour Government since July 2024.
What did the Spring Statement say?
In a statement, Prime Minister Rachel Reeves confirmed a recovery of a series of “non-negotiable” fiscal rules, including balancing the government’s budget by 2029/30, so that daily sector spending is filled with tax receipts alone.
Government efforts to reduce government spending deficits (annual borrowings used in regular government activities) have recently been eclipsed by global uncertainty, which has recently increased the cost of government interest payments and has been hampered by the Ministry of Finance’s fiscal “headroom.”
In response, Reeves made cuts that shake up the UK welfare budget and launched a cost-cutting drive across Whitehall.
In checking the government’s “headroom”, Reeves outlined plans for a fiscal surplus of £6 billion by 2027/8, £7.1 billion in 2028/29 and £9.9 billion in 2029/30.
If she had not made any changes to the government’s plans, Reeves said there would still be a fiscal deficit of £4.1 billion in 2029-30.
In a spring statement, Reeves leaned optimistically on some of the challenges. The challenge is particularly poor forecasts of defense spending and UK economic growth. Trump tariffs are also looming for Europe.
UK GDP forecasts have been reduced and then raised
In the latter, she said the OBR is the latest economic group to revise its UK GDP forecast downwards from 2% to 1% in 2025. GDP is then projected to increase to 1.9% in 2026, 1.7% in 2028 and 1.8% in 2029.
Nonetheless, OBR’s expectations are more optimistic than those created by the Bank of England, which is expected to increase UK GDP by 0.7% in 2025.
In terms of inflation, OBR predicted that annual inflation rates would average an average of 3.2% in 2025 and 2.1% in 2026, achieving the Bank of England’s 2% target in 2027.
“From 2026 onwards, CPI inflation will go back rapidly to the 2% target as energy prices fall, food price inflation declines, and wage growth eases back from the current announced levels,” predicts.
The Bank of England is also more pessimistic about this. In its quarterly financial report in February, the bank said it would rise to 3% in the first quarter of 2026 and fall to 2.3% in the first quarter of 2027 after expecting CPI headlines to be 2.8% in the first quarter of 2025.
Elsewhere in the statement, Reeves confirmed several new defence spending measures, including the Department of Defense’s additional £2.2 billion for next year.
What did the Spring statement say?
As the market and commentators had anticipated, the speeches in the Spring Statement themselves did not mention individual taxation.
However, subsequent content published by the Treasury Department confirms that the government is still considering reforming the UK’s ISA tax system to encourage savers to invest in growth businesses.
“The government is looking at ISA reform options that balance cash and stocks to get better returns for savers, boost a culture of retail investment and support growth missions.”
“Added to this, the government is working closely with financial conduct authorities to provide a system of targeted support to give people confidence in their investment.”
Will the Bank of England continue to cut fees in 2025?
As an independent body responsible for setting interest rates in the UK, the Bank of England’s decisions are closely monitored by traders and investors.
At the latest meeting on March 20th Bank’s Monetary Policy Committee voted to hold interest rates at 4.5% by an 8-1 majority.
Interest rate swap data shows a 76.8% chance of another interest rate cut at the bank’s May meeting. Data previously showed a 55.6% chance of further reductions in August. The chances of this happening now falling to 44.2%, below what is needed for market consensus. This could potentially bring UK interest rates to 4.25%, which is higher than in recent years.
However, there is still important uncertainty surrounding this. At this point, the geopolitical picture changes every day, and stock and bond investors want to know Knock-on effects of Trump administration’s tariffsin addition to deals made with Russia and Ukraine about the future of the latter. The next important date is April 2nd, when more US customs duties are expected to be imposed.
Investors will obtain the following updates on future interest rates from the Bank of England when they publish their quarterly monetary policy report on May 8th.
