The UK government may not acknowledge it, but tax increases are on the horizon — and the choices are limited.

People walk near the Elizabeth Tower, commonly referred to as Big Ben, near the Houses of Parliament in Westminster, central London on April 18, 2017.

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The U.K. government is hesitant to acknowledge it, but economists say it’s highly likely that the Treasury will need to increase taxes in the fall to address a significant gap in the public finances it has created for itself.

The National Institute of Economic and Social Research (NIESR) is the latest economic think tank to caution that taxes will need to rise later this year if British Chancellor Rachel Reeves aims to meet her self-imposed “fiscal rules.”

These rules target a balanced budget or surplus by the end of the decade, with the so-called “stability rule” requiring that day-to-day spending is funded by tax revenues rather than borrowing. Additionally, the debt, as a proportion of GDP, should be decreasing by the end of this parliament (in 2029-30), referred to as the “investment rule.”

“The Government is not on track to meet its ‘stability rule’, with our forecast suggesting a current deficit of £41.2 billion in the fiscal year 2029-30,” NIESR stated in an economic outlook released Wednesday.

“Substantial adjustments in the Autumn Budget will be needed if the Chancellor is to remain compliant with her fiscal rules,” it added in the report.

With the government having fixed its spending plans for the next couple of years in its recent Spending Review, “the only lever available is to raise taxation in a moderate but sustained way,” the think tank noted in the report titled “the Chancellor’s Trilemma.”

The ‘trilemma’ refers to the challenging position Reeves finds herself in due to her own fiscal rules, commitments made over the last year, and the Labour Party’s manifesto promise not to increase taxes on “working people.”

“Simply put, the Chancellor cannot simultaneously meet her fiscal rules, fulfill spending commitments, and uphold manifesto promises to avoid tax rises for working people. At least one of these will need to be dropped – she faces an impossible trilemma,” NIESR stated.

Britain’s Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves on June 23, 2025.

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It’s important to note that NIESR’s forecast for the budget deficit could be even higher, around £51.1 billion, if Reeves aims to retain approximately £9.9 billion in fiscal “headroom” that the Treasury had planned for, which has been slowly diminished due to alterations in welfare reforms and cuts to winter fuel payments for pensioners.

“For the Chancellor to effectively build a reasonable buffer against her fiscal rules, she will need to consider raising VAT or income taxes. VAT is the least distortionary tax but is also the most regressive. Thus, increases in income tax rates may be the more suitable option, as we have previously posited,” NIESR remarked, while acknowledging the limited viable choices for the chancellor.

British Prime Minister Keir Starmer was asked about the NIESR report on Wednesday and the suggestion that tax rises would be necessary, but he stated he did “not recognize” the figures. Nonetheless, he declined to rule out hikes to VAT, income tax, and corporation tax in the fall, as reported by Sky News.

“Some of the figures being put out are not figures I recognize, but the budget won’t be until later in the year, and that’s why we’ll have the forecast then and will set out our plans,” he said.

NIESR indicated that Chancellor Reeves faces “unenviable decisions” for the Autumn Budget, when she will unveil taxation and spending plans for the year ahead.

“Unfortunately, the most politically acceptable choices for tax increases would either yield minimal revenue or have significant distortionary effects, or both,” the think tank suggested, highlighting that certain measures—such as extending income tax thresholds—would “particularly impact poorer households.”

Other options, such as cutting the current £20,000 tax-free cash ISA allowance or increasing capital gains tax rates, could disincentivize saving, the think tank warned.

The government could also reverse cuts to employees’ national insurance contributions (NICs) but “while this would generate significant revenue over the parliamentary term,” it would again contravene the manifesto pledge not to raise taxes on working people and could have strong “distortionary effects by discouraging job creation, likely leading to increased unemployment.”

A general view of people visiting the Trafalgar Tavern pub decorated with bunting and string lights on the bank of the River Thames in Greenwich on December 16, 2023.

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When Reeves announced her government budget last fall, she unveiled a £70 billion boost to public spending to be funded by higher borrowing and £40 billion in tax rises, primarily affecting British businesses. At that time, she maintained it was a one-off move, telling lawmakers that “we’re not going to be coming back with more tax increases, or indeed more borrowing.”

Reeves could consider adjusting corporation tax rates and allowances which could also generate significant tax revenues, but this would contradict her previous commitment to cap corporation tax at 25% for the duration of the parliament. It would also likely undermine business confidence, which has already suffered after an increase to employer NICs that took effect in April.