Keir Starmer’s speech on Tuesday will have done little to dampen speculation about the potential tax rises in October’s Budget.
The Prime Minister cautioned that Brits could expect a “painful” Budget, arguing the fiscal inheritance was “worse than we ever imagined”.
Chancellor Rachel Reeves has already said that she thinks taxes will go up. In his speech today Starmer said that those with the “broadest shoulders should bear the heavier burden”.
So where will Starmer and Reeves turn to raise some extra cash?
Capital Gains
Many in the City are nervous that Rachel Reeves is preparing to lift the rate of capital gains tax in line with income tax. The Chancellor has said she has “no plans” to do so, but has not explicitly ruled out such a measure.
Capital gains tax is imposed on the profit resulting from the sale of capital assets. The highest rate is 28 per cent, much lower than 45 per cent additional rate of income tax. According to a report from the Institute for Fiscal Studies (IFS), equalising capital gains and income tax could raise £16.7bn.
However, there are widespread concerns about the potential knock-on effects of hiking capital gains tax, particularly in the UK’s entrepreneurial landscape.
Many economists – and HRMC’s own analysis – suggests that increasing capital gains tax could actually reduce the tax take, because people are more likely to delay selling their assets.
Pension reform
Another potential option for Reeves is to reduce the extent of tax reliefs on pension contributions. A report released by the Fabian Society outlined a swathe of options which, cumulatively, could raise around £10bn per year.
Existing tax reliefs, the think tank argued, are weighted in favour of the rich. Although upper-and top-rate taxpayers account for 19 per cent of those paying tax, they received over half of the tax relief on pensions in 2022-23.
The Fabian Society outlined a range of measures which they argued would create a fairer system, most prominently by cutting the amount pensioners are able to withdraw from their pension pots without paying tax.
The think tank also suggested that pensions should be subject to inheritance tax and that there should be a flat rate of relief on contributions. Currently pension contributions are tax deductible, with the extent of tax relief depending on someone’s marginal tax rate.
Council tax
Think tanks have been urging the government to reform council tax for years, and its not difficult to see why. Council tax bands are based on property valuations taken back in 1991, which the IFS said is “increasingly absurd”.
Since 1991, house prices have changed dramatically and unevenly across the country. An IFS report suggests that the average price in London is now more than six times what it was in 1995, compared with barely three times in the North East.
In effect this means households in the midlands and the north are in too high a band while households in the capital are in too low a band.
For example, according to analysis conducted by the Northern Powerhouse Partnership, the annual council tax bill in Westminster is £973 whereas it its £2,278 in Hartlepool.
Inheritance tax
Inheritance tax is one of the UK’s most controversial taxes. Under the last government there were frequent rumours that it might be abolished, but now it looks like it could be subject to important reforms.
Currently inheritance tax stands at 40 per cent and is paid on estates worth over £325,000. However, there are a range of exemptions which mean only five per cent of deaths are taxed and often at a much lower effective rate.
Under the current rules, savings kept in defined contribution pension pots can be passed on tax free. Agricultural land can also be passed on without paying tax while shares in London’s AIM market receive special treatment if held for two years before death.
The IFS has argued that the government could raise an extra £4bn by closing these loopholes in the inheritance tax system.