Chancellor faces tough choices as Budget options narrow without income tax hikes

John Healey may target banks, gambling machines and online marketplaces to restore fiscal headroom

By LineZotpaper AI staff

Published25 October 2026

Read Time4 min

Sources2 outlets

Chancellor John Healey is preparing to deliver a Budget on Wednesday with dwindling fiscal headroom and a manifesto pledge not to raise income tax, VAT or National Insurance rates. Analysis by BBC Verify outlines possible revenue-raising measures including higher taxes on banks, gambling machines and online marketplaces, as well as cuts to welfare spending, each carrying trade-offs and political risks.

The government's cash buffer, known as fiscal headroom, is estimated to have halved from around £24bn to as low as £11bn in the past six months, partly due to rising interest rates on government borrowing. Economists believe the chancellor may need to raise money to show the government's plan to reduce borrowing by the end of the Parliament remains on track, while also facing pressure to help with the cost of living and fund defence spending.

Labour's 2024 election manifesto ruled out increasing rates of income tax, VAT or National Insurance. Options such as capital gains tax increases and extending the mansion tax have been ruled out by government sources, leaving Healey with a narrower set of choices.

Taxes on banks

One option is increasing the surcharge banks pay on corporation tax from 3% to 5.5%. Think tank Tax Policy Associates estimates this could raise an additional £1bn to £2bn a year. Banks have warned that higher taxes could deter investment in the UK, potentially reducing jobs, and that ordinary savers could be indirectly affected through pension investments that include bank shares. Banks could also pass costs to customers through lower savings rates or higher borrowing costs, research suggests.

Gambling machine taxes

Former prime minister Gordon Brown has called for a hike in the tax on electronic gaming machines, which can offer payouts of £500 per game. The Social Market Foundation think tank estimates doubling the tax from 20% to 40% could raise between £275m and £460m, depending on how gamblers react. Anti-gambling groups argue this could help discourage problem gambling, noting that machines are increasingly clustered on deprived high streets and that one in four players of casino games on these machines gamble at risky or harmful levels. The gambling industry has argued that such a tax hike could cause betting shops to close, reducing the money bookmakers contribute to horse racing and potentially putting jobs in that industry at risk.

Online marketplace VAT

Reports suggest the chancellor may announce that big online marketplaces such as Amazon, Ebay and Temu will be made responsible for collecting VAT owed by retailers selling on their platforms. The Treasury estimates it is missing out on around £12bn a year in VAT revenues, the "VAT tax gap", partly because some online sellers fail to comply with VAT rules. This move could raise around £1bn in extra VAT annually. Amazon supports the proposal and has estimated it could raise £700m a year. Some sellers could respond by raising prices or leaving the platform, but the measure would also level the playing field for compliant sellers.

Welfare spending cuts

The three tax measures together would raise a maximum of only around £3.5bn a year, small relative to the sums the chancellor may need. Prime Minister Andy Burnham said in the summer he wanted a "fair and lasting" reduction to the UK's welfare bill. The Conservatives claim they could make savings of £36bn a year by restricting access to welfare payments; Reform say they would save £50bn a year, though independent analysts question how realistic such figures are. The cost of working health and sickness benefits has risen sharply since the pandemic, projected to increase from £68bn this year to £81bn in 2031. Keir Starmer and Rachel Reeves previously attempted to cut spending by £5bn a year by 2030 but reversed course after a backbench Labour revolt. Independent welfare experts say savings are possible but would likely require upfront spending to help people into work, which could cancel out near-term savings. Cuts would reduce incomes for recipients, and campaigners warn of the risk of pushing people into poverty.

The Budget will be presented on Wednesday.

RSS

Analysis

Why This Matters

The Budget will signal the government's fiscal priorities and its ability to meet self-imposed borrowing targets.
Decisions on bank taxes, gambling duties and online marketplace VAT will directly affect businesses, investors and consumers.
Welfare changes could reshape the social safety net for millions of people, with implications for poverty and employment.

Background

Labour won the 2024 general election on a manifesto that ruled out increases in the main rates of income tax, VAT and National Insurance. With rising interest rates eroding fiscal headroom, the buffer against borrowing rules, Chancellor John Healey must find other ways to raise revenue or cut spending to keep the government's fiscal plan on track. Previous attempts by the Starmer government to reduce welfare spending were abandoned after internal party opposition.

Key Perspectives

Banks: have warned that higher taxes could deter investment in the UK, reduce jobs and indirectly affect savers through pension holdings.
Gambling industry: argues higher taxes on machines could lead to betting shop closures, reduce contributions to horse racing and put jobs at risk.
Anti-gambling groups: say a tax hike would help discourage problem gambling, particularly on deprived high streets.
Amazon: supports making online marketplaces responsible for VAT collection, estimating it could raise £700m a year.
Welfare campaigners and experts: warn that cuts risk pushing people into poverty but note savings are possible with upfront spending on employment support.
Conservatives and Reform UK: claim large savings from restricting welfare access, though independent analysts question the realism of their estimates.

What to Watch

The Budget presentation on Wednesday, including any specific tax rates or welfare measures announced.
Reaction from financial markets to the chancellor's fiscal headroom projections.
Response from Labour backbenchers and opposition parties to any welfare cuts or tax increases.

Sources

Checked

12 claims in this story checked against 1 source: 8 supported.

Show each claim

SupportedBudget options are narrowing because income tax, VAT and National Insurance rate rises are ruled out by Labour’s manifesto pledge, while capital gains tax increases and extending the mansion tax have been ruled out by government sources.BBC News: “Labour's 2024 election manifesto pledged not to raise the rates of income tax, VAT or National Insurance. Increasing taxes on capital gains or extending the mansion tax had been raised as possible options but have since been ruled out by government sources.”
SupportedHealey may target banks, gambling machines and online marketplaces to raise money.BBC News: “BBC Verify has looked at what other options could be on the table for the chancellor to raise some more money”
SupportedJohn Healey is preparing to deliver the Budget on Wednesday.BBC News: “BBC Verify has looked at what other options could be on the table for the chancellor to raise some more money, external on Wednesday.”
Partly supportedFiscal headroom is estimated to have halved from around £24bn to as low as £11bn in the past six months.BBC News: “Economists think the buffer might have halved in the last six months from around £24bn to as low as £11bn”
SupportedThe headroom reduction was partly due to rising interest rates on government borrowing.BBC News: “in part because of rising interest rates the government has been paying to borrow money from private investors.”
SupportedThe proposed bank surcharge increase is from 3% to 5.5%, and Tax Policy Associates estimates it could raise £1bn to £2bn a year.BBC News: “increasing the surcharge that banks pay on corporation tax from 3% to 5.5% could potentially raise an additional £1bn to £2bn a year for the Treasury.”
Partly supportedAnti-gambling groups argue that doubling the machine tax could help discourage problem gambling.BBC News: “though anti-gambling groups argue this could help discourage more people from using them.”
Partly supportedGambling machines are increasingly clustered on deprived high streets.BBC News: “gambling machines are increasingly clustered on some of the UK's most deprived high streets”
SupportedThe Treasury estimates a VAT tax gap of around £12bn a year, and making online marketplaces collect VAT could raise around £1bn a year; Amazon estimates £700m.BBC News: “The Treasury estimates it is missing out on around £12bn a year, external in VAT revenues”
SupportedThe Conservatives say welfare restrictions could save £36bn a year, while Reform says it could save £50bn a year.BBC News: “The Conservatives claim they could make savings of £36bn a year by restricting people's access to welfare payments. Reform say they would save £50bn a year in this way”
Partly supportedThe cost of working health and sickness benefits is projected to rise from £68bn this year to £81bn in 2031.BBC News: “the overall cost is projected by the Office for Budget Responsibility to increase from £68bn this year to £81bn in 2031.”
SupportedThe three tax measures together would raise a maximum of around £3.5bn a year.BBC News: “The above three tax measures together would raise a maximum of only around £3.5bn a year.”