Labour’s fiscal strategy is heavily constrained by explicit manifesto pledges ruling out any increases to the rates of Income Tax (basic, higher, or additional), National Insurance, or VAT, alongside a commitment to cap Corporation Tax at 25%. To close the substantial fiscal gap, estimated to require gross revenue generation approaching £30–40 billion (when accounting for non-negotiable spending), the Chancellor is compelled to employ a strategy focused on “stealth” taxes and targeted measures on wealth.
The Engine of Revenue: Stealth Taxation via Fiscal Drag
The main way the government plans to raise this money is by freezing the income levels at which people start paying tax. Even though official tax rates aren’t changing, rising wages and inflation (which was 3.6% in October 2025) mean that more people will be pushed into higher tax brackets.
This process, known as “fiscal drag,” is expected to generate a massive £42.9 billion by 2027 and will increase the number of higher-rate taxpayers from four million to over ten million. While this helps the government keep its election promises, economists worry it might discourage people from working harder or saving money.
Targeted Wealth Measures and Expenditure Commitments
Beyond these stealth measures, the budget is expected to target assets and property, which the government views as undertaxed. We may see higher taxes on profits from selling assets (Capital Gains Tax), stricter rules on inheritance and tax-free gifts, and higher taxes on expensive homes, potentially including a “mansion tax” for properties worth over £2 million.
This extra money is needed to pay for expensive commitments, such as increasing the State Pension by over £550 a year and lifting the cap on benefits for larger families. To make the numbers work, the Chancellor may also introduce smaller charges, such as a tax per mile for electric vehicle drivers and reduced tax perks for high earners paying into pensions.
