What taxes can the UK government raise in the Autumn Budget?
Sir Keir Starmer has put the UK on notice that tax rises are on the way in the Autumn Budget, warning that his new Labour government faces “painful” decisions on the public finances.
The prime minister has already spelt out a handful of tax reforms, including axing “non dom” status and levying VAT on private school fees. But he has pledged not to increase income tax, national insurance or VAT, which account for two-thirds of government revenues.
Given those constraints, economists expect chancellor Rachel Reeves to seek to raise at least £20bn of extra tax revenue on October 30 through measures targeting the wealthy, businesses and pension savers.
Higher levies on the wealthy
Starmer’s assertion on Tuesday that “those with the broadest shoulders should bear the heavier burden” has focused attention on wealthy taxpayers. This points towards capital gains tax as the key way of boosting Treasury income.
Arun Advani, associate professor at Warwick university, said reform of CGT — which is paid on the profit from the sale of assets ranging from shares to second homes — was “the biggest and most likely thing they can do to raise some serious money”.
CGT raised £16.9bn in 2022-23, according to official figures, making it far less lucrative than income tax, national insurance or VAT, which together raised more than £580bn in the same period.
But economists, including at the leading Institute for Fiscal Studies think-tank, estimate that the Treasury could raise high single-digit billions of pounds a year by aligning CGT rates with those of income tax.
The highest rate of CGT is 28 per cent now, far lower than the 45 per cent top rate of income tax.
If the Treasury aligned rates it would probably introduce an indexation allowance for inflation, experts said. Another £1.5bn or so could be raised by cutting some of the reliefs against inheritance tax, such as on business assets.
Asked if she could rule out a rise in IHT or CGT, Reeves told reporters on Wednesday that she was “not going to write a Budget two months ahead of delivering it” and that ministers faced “difficult decisions in a range of areas”.
Narrowing pension reliefs
Examining the complex system of reliefs and incentives surrounding pensions is a potentially lucrative area that would avoid violating election manifesto pledges. But as Tom Pope, deputy chief economist at the Institute for Government think-tank noted, any changes would be politically contentious.
Among the options open to Reeves are restricting relief on pension contributions to the basic rate of income tax, which would in the long term represent a £15bn a year increase in taxation, according to the IFS.
Most of that would come from the top 20 per cent of earners. Such a move would provoke a fierce backlash, however, given the broader drive to encourage savings for retirement.
A less lucrative option would be to trim the tax-free lump sum that savers can withdraw from their pensions up to a limit of 25 per cent at present.
The IFS has estimated that lowering this cap would boost income tax by £5.5bn, but Helen Miller, head of tax at the think-tank, said it was “extremely unlikely” that the government would scrap it entirely.
Labour has also in the past contemplated reintroducing the lifetime allowance on pensions, which was scrapped by Reeves’s Conservative predecessor Jeremy Hunt.
Less fiscally radical steps could include bringing pension pots within the scope of inheritance tax.
Boosting levies on employers
Starmer’s government has vowed to create a stable platform for investment by capping corporation tax at 25 per cent and introducing a “road map” for business taxation during its first 100 days in power.
But that does not mean businesses will emerge unscathed from the Budget. While Labour has pledged not to increase employee national insurance contributions, economists think it will be tempted to find ways of getting employers to pay more.
One way would be to impose employer national insurance on pension contributions, which could raise more than £12bn. Buy-to-let landlords could also fall in the crosshairs if the Treasury sought to impose national insurance on rental income.
Other measures
Previous Budgets, including under former Labour chancellor Gordon Brown and ex-Conservative chancellor George Osborne, have shown the Treasury has myriad ways of accumulating pots of extra cash via small, targeted tax measures that, in aggregate, amount to substantial sums.
Reeves’s first Budget is likely to be no different, economists said. Although she has ruled out a host of big-ticket items — a 3p increase in the basic rate of income tax would raise more than £20bn, for example — she does not lack revenue-raising options.
She is also unlikely to be content with a low-key tax-raising package, having warned of “incredibly tough choices” to fill in a £22bn fiscal hole she claimed was covered up by the last Tory government.
Ben Nabarro, economist at Citigroup, said Starmer and Reeves had “invested a lot of political capital in teeing up a tough Budget, so on tax there is little point in raising modest sums”.
“To build up a sufficient amount of budget headroom, while covering the spending decisions announced in July, I think Labour will be aiming to raise at least £20bn a year in extra taxes,” he added.