Autumn Budget 2026: What could it mean for VAT and business growth?

When success comes with a surcharge

The clearest examples are found in the thresholds scattered across the tax system. Once income for tax purposes exceeds £100,000, the Personal Allowance is progressively withdrawn. In England, Wales and Northern Ireland, this produces an effective income tax rate of 60% between £100,000 and £125,140.

For parents, the consequences can be greater still. Crossing £100,000 can also mean losing Tax Free Childcare and the entitlement to Free Childcare for Working Parents. Faced with that combination, perfectly rational people reduce their hours, turn down additional responsibility or increase their pension contributions to keep their income below the line.

Saving into a pension is generally sensible. Doing it principally to avoid an arbitrary tax trap is evidence of a system working against itself.

The same problem appears in less obvious places. The £40,000 list price threshold for the Expensive Car Supplement was introduced in 2017 and remains in place for petrol, diesel and hybrid cars. Electric cars lost their exemption from the supplement in 2025 and were initially caught by the same £40,000 threshold. A separate £50,000 threshold for zero emission cars took effect from April 2026.

Whatever the merits of the charge, a threshold intended to identify genuinely expensive cars inevitably catches more ordinary vehicles as prices rise. The tax system quietly changes without Parliament changing the tax.

A recipe for confusion

This is the backdrop against which the Chancellor must approach VAT. The first principle should be restraint.

A new Chancellor would be unwise to begin by changing VAT rates or redrawing the boundaries between taxable, exempt and zero-rated supplies. VAT has a long history of turning apparently simple political ideas into administrative disputes.

The “Pasty Tax” remains the classic example. Ministers attempted to distinguish between food that was deliberately kept hot and food that was merely cooling naturally. The result was public ridicule, hurried revisions and rules that required businesses to consider the temperature and intended condition of a sausage roll.

The absurdity did not end in 2012. In 2025, Morrisons lost a long running dispute over whether its so called cool down rotisserie chickens were hot food, leaving it facing VAT assessments of more than £17 million. Thirteen years after the Pasty Tax, one of Britain’s largest supermarkets was still arguing with HMRC about what “hot” means.

VAT on private school fees offers a more recent warning. Schools that previously treated their core educational activities as exempt have had to navigate a partly taxable regime involving registration, input tax recovery, advance fees, bursaries, connected entities, boarding and mixed supplies.

Whatever one thinks of the policy, it illustrates the practical consequences of changing the VAT status of an established sector. The legislation may fit on several pages. The uncertainty, professional costs and behavioural changes can last for years.

That does not mean the Chancellor should leave every aspect of VAT untouched. There is an important distinction between changing what VAT applies to and reforming the thresholds and administrative rules that actively impede growth.

The £90,000 glass ceiling

The VAT registration threshold is currently £90,000 of taxable turnover, measured over any rolling 12-month period. It is one of the most powerful brakes on small business growth in Britain.

For a business selling mainly to other VAT registered businesses, registration may be relatively painless because customers can usually recover the VAT charged. For a tradesperson, hairdresser, café or consultant selling to the public, it can be a very different matter. Passing the threshold may require prices to rise sharply or margins to fall.

The predictable response is to stay below it.

Some owners decline work. Some close for part of the year. Others avoid hiring, advertising or investing because success would push them through the threshold. This is not anecdotal irrationality. It is a commercially sensible response to a badly designed incentive.

The Chancellor has three broad choices.

The threshold could be raised substantially and then indexed, allowing genuinely small businesses more room to grow. Alternatively, it could be lowered significantly, bringing many more businesses into VAT and reducing the competitive distortion between those just below and just above the line. That would create greater neutrality, although it would also impose compliance costs on very small enterprises and would need sensible protection for hobby businesses and occasional trading.

The more imaginative answer would be to soften the cliff edge. A business entering the VAT system could receive a temporary and gradually declining reduction in the net VAT it must pay. The relief would diminish as turnover increased, allowing the full obligation to emerge progressively rather than arriving all at once.

There would be design challenges. Any taper must avoid creating new boundaries, opportunities for manipulation or excessive complexity. But those are reasons to design it carefully, not to accept a system that encourages businesses to stop growing.

Reform is further complicated by the Windsor Framework. Northern Ireland remains aligned with European Union VAT rules for goods, and ministers have acknowledged that its registration threshold cannot currently be raised above £90,000. A higher threshold in Great Britain could therefore create different rules within the United Kingdom. That is a genuine constraint, but it should be addressed openly rather than used as an excuse for inertia.

The small print that time forgot

There are smaller thresholds that also deserve attention. Under the VAT partial exemption rules, businesses making both taxable and exempt supplies normally have to restrict the VAT recovered on costs connected with their exempt activities.

The de minimis rule allows a business with only a limited amount of exempt input VAT to recover it in full, broadly as if it were a fully taxable business. The principal limit is £625 a month on average, with exempt input VAT also required to be no more than half of total input VAT. That cash limit has remained unchanged for more than three decades.

It is difficult to believe that a figure considered modest in the early 1990s remains appropriate today. Yet this is how fiscal drag spreads through the tax system. Sometimes it raises revenue. Sometimes it simply creates calculations, restrictions and professional fees that add little to the Exchequer and nothing to productivity.

The Treasury cannot reap what it will not let grow

The Chancellor’s first Budget should therefore apply a simple test to every significant tax threshold: does it cause people to suppress income, refuse work, delay investment or restrict expenditure for reasons that have little to do with the underlying economics?

Where the answer is yes, reform should follow.

This would be a more credible growth strategy than another round of targeted allowances, temporary reliefs and political announcements. Britain does not lack ambition. It has built a tax system that too often penalises the moment when ambition begins to succeed.

The Chancellor should resist changing what VAT applies to or the rates charged. But the thresholds, tapers and administrative rules that discourage productive behaviour should be examined with urgency.

The Government is entitled to a fair share of the harvest. But that entitlement carries obligations of its own: to spend wisely, confront waste and resist the assumption that every problem requires more government and every shortfall more tax. Before demanding a larger share, it must allow the harvest to grow.