The first “Spring Forecast”
The Chancellor has commissioned a “Spring Forecast” which is due to take place on 26 March 2025 but what are we expecting? To be honest, no one really knows as this is the first so-called “forecast” as they are usually called either a “statement” or “budget” and it is the first spring fiscal event under a Labour government since Alistair Darling in March 2010, and a lot has changed since then.
In the announcement of the Spring Forecast[1] in December 2024, there is a restatement of the commitment to “one major fiscal event a year to give families and businesses stability and certainty on upcoming tax and spending changes and, in turn, to support the government’s growth mission.” The Office of Budget Responsibility[2] (OBR) have confirmed that they will be publishing their latest outlook on the economy and public finances on that day which all seems pretty straightforward.
However, there is growing speculation in the media that Rachel Reeves will be forced to re-assess her commitment to only one fiscal event per year due to her ever-decreasing fiscal headroom. The Institute of Fiscal Studies[3] point to the lower than anticipated surplus in January 2025 which in part was driven by lower-than-expected 31 January self-assessment tax payments. Over 500k[4] taxpayers were late to file their 2023/24 tax returns so perhaps this can account for some of the reduction in self-assessment tax payments received in January and therefore the lower than anticipated surplus but the late tax return filers are not at a dissimilar level to most years, so this is not the complete answer. We will have to wait and see what the OBR publish on 26 March 2025, but early indicators are not giving the Chancellor many options.
Income tax
We know that the Chancellor needs to set the income tax rates and tax bands for the next tax year which is usually why the fiscal event happens in March just ahead of the start of the tax year on 6 April 2025. Rachel Reeves has already committed to not increasing the rates of income tax and does not have enough fiscal headroom to make any cuts to the rates, so we are not expecting any announcements in relation to income tax rates.
There is speculation that the Chancellor will extend the ‘frozen’ tax bands beyond April 2028[5] as she can no longer afford to end the freeze as she previously announced in the Autumn Budget 2024. This is likely to be unpopular but is seen as a “least worse” option for a Chancellor with limited options. Remember the National Insurance increases only come into effect from 6 April 2025 so it seems unlikely that the Chancellor will want to do anything to impact after-tax pay packet at least in the short-term to allow everyone to readjust to the increased NIC.
‘Non-dom’ rules
We are expecting some softening of the “non-dom” rules which was announced by Rachel Reeves at Davos in January 2025[6] and the Spring Forecast could be the opportune moment to provide further details if they are not announced in the weeks running up to it. Given that the new non-dom rules come into effect from 6 April 2025, it is unlikely that any softening of the new rules will have much impact (if any) on those who are currently reviewing their tax position as there is little time left to react. The speculation is that the softening will be in relation to the Temporary Repatriation Relief (TRF) perhaps extending it beyond three years and/or making the tax rate more attractive – perhaps 10% rather than 12%.
In my view, the best way to soften the impact of the non-dom changes for those who have been in the UK for more than 10 years is to continue to provide inheritance tax (IHT) protection. From my discussions with clients, IHT is the key determining factor on whether they choose to remain in the UK or move elsewhere. Softening other changes is likely to have little or no impact on non-doms considering relocating elsewhere especially if the relaxations are only announced at the last minute.
Property reliefs
There is also the hot topic of Business Property Relief (BPR) and Agricultural Property Relief (APR) and the £1 million cap that is due to be introduced from April 2026. Despite the NFU[7] and others putting forward alternative proposals, such as a clawback if the inherited farm was sold, the NFU have reported that the government is unlikely to implement any changes to their proposals. It is therefore unlikely that we will see any announcements in relation to APR and/or BPR in the Spring Forecast even the rumoured softening for elderly farmers who have less time to re-think their succession plans which would have been welcome relief (for some at least).
Since the Autumn Statement in October 2024 there has been speculation about a potential change to the tax rates on dividend income. Currently, the top dividend rate is 39.35% compared with 45% (on unearned income) or 47% (on earned income). The differential is due to the fact that businesses pay corporation tax on their profits but do not get tax relief on paying dividends to shareholders, i.e. dividends come out of profits after tax. Dividends used to attract a 10% tax credit for the shareholder, but this was abolished from April 2016, and we were left with a lower dividend tax rate to recognise the differing tax treatment. Some consider that there is no longer a justification for the differing rates and have argued for an alignment with income tax rates.
Dividends
Unlike income such as salaries, which are generally taxed throughout a year, dividends are (mostly) taxed when they are paid so it is possible to change the tax rate from a particular date rather than need to wait for the start of a tax year. This means that Rachel Reeves could increase the dividend tax rate from on or after 26 March 2025. Having said this, if it were announced that the dividend rate were to increase from 6 April 2025, I would expect there to be a flurry of dividends declared between the date of the announcement and 5 April 2025 which could drive up tax revenues. As dividends are tax-free in pensions and ISAs and everyone has a £500 tax-free dividend allowance, a tax rise on dividends is unlikely to be unpopular for the majority of taxpayers which is why the Chancellor may choose this option amongst her limited set of options.
Looking ahead
Some of the bigger potential tax changes that have been rumoured such as introducing a gift tax or re-designing the capital gains tax regime are unlikely to be top of the pile for the Spring Forecast given that it has been trailed as a non-fiscal event with a statement from the Chancellor.
Having said this, I am advising my clients who are considering planning options to implement their plans sooner than later because even if the Chancellor sticks to her word and does not make any fiscal changes on 26 March 2025, she certainly could pave the way for changes at the next fiscal event and these are unlikely to be more generous than the current rules and could have an immediate impact even if the rules do not change straightaway (known as the “anti-forestalling” provisions) which seem to be increasingly popular. For example, with the BPR changes, we all know that they come into effect from 6 April 2026 but if you undertake planning between 30 October 2024 and 5 April 2026, certain “anti-forestalling” provisions apply to limit the impact of any planning. I am not feeling the usual sense of anticipation for the Spring Forecast, but I have cleared my day just in case.
If you have any questions regarding the Spring Forecast or any of the above, please do not hesitate to contact myself, Jo Bateson, or your usual contact at Mercer & Hole.
[1] Chancellor commissions Spring Forecast on 26 March 2025 – GOV.UK
[2] Spring 2025 forecast date announced – Office for Budget Responsibility
[3] New revenue figures tee up consequential Spring Forecast | Institute for Fiscal Studies
[4] 11.5 million file Self Assessment by 31 January deadline – GOV.UK
[6] Non-domicile Status – Hansard – UK Parliament
[7] NFU responds to Treasury family farm tax meeting – NFUonline
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