With the Autumn Budget less than two weeks away, speculation about which taxes Chancellor Rachel Reeves will opt to raise has reached fever pitch.
On entering No 11 Downing Street, Reeves commissioned the Treasury to conduct a thorough spending audit, which she claimed unearthed a “fiscal black hole” of £22bn, paving the way for a slew of tax rises that hadn’t been in her party’s manifesto.
The additional tightening would help funnel additional money into the NHS and avoid the real-terms cuts that were earmarked for unprotected departments under the Conservatives’ fiscal plan, it is believed.
The government has also reaffirmed its pledge not to raise taxes on ‘working people’ – which most observers have taken to mean income tax, employee national insurance and VAT – and vowed to maintain corporation tax at 25 per cent at the recent Investment Summit.
It has also ruled out introducing a blanket wealth tax.
And with gilt yields having risen substantially in recent weeks – making government borrowing more expensive – respected think tanks like the Institute for Fiscal Studies (IFS) have argued that this leaves few revenue-generating levers for the Chancellor to pull going into her Budget.
So, which taxes are most likely to go up?
Capital Gains Tax
Treasury officials have reportedly drawn up plans to hike capital gains tax, a tax levied on the increase in value of an asset between the points of purchase and sale.
The capital gains rate sits at 20 per cent on all chargeable assets other than residential property, where the tax is levied at 24 per cent on homes that aren’t a primary residence.
A Guardian report indicated that the levy could be lifted to as much as 39 per cent, moving it much closer to income tax. However, the government has sought to dispel fears of such a hefty increase.
Speaking about the capital gains rumours at the Investment Summit on Monday, Starmer said: “a lot of speculation is getting pretty wide of the mark”.
One issue for the government is that it’s very unclear how much the Treasury could raise through capital gains reform. Because a lot of capital gains revenue comes from a small minority, behavioural changes can have a big impact on revenue.
The Treasury’s own analysis, published over the summer, indicated that a big increase could actually cost the Exchequer because it would limit the number of transactions.
Smaller changes under consideration include scrapping the capital gains ‘uplift’, which effectively means assets can be passed on at death without paying any tax.
Many think tanks have also argued that asset disposal relief – a preferential rate for business owner-managers – was not well-targeted at entrepreneurship and could be reformed.
Inheritance Tax
Despite only four per cent of estates in the UK paying it, inheritance tax regularly polls as the least popular tax among voters.
Economists and tax experts have long been of the view that the levy, which is applied at a rate of 40 per cent on estates worth over $325,000, is ripe for reform.
The majority of misgivings revolve around the many provisions or ‘loopholes’ that the tax allows, including agricultural relief – which is supposed to allow farmers to pass down their land inheritance tax free – and business relief, which is supposed to allow for family businesses to be handed down a generation without being broken up.
However, new research from the Centre for the Analysis of Taxation (Centax) shows that estates worth £10m or more have paid an average rate of inheritance tax of just nine per cent in recent years, suggesting these provisions are being taken advantage of.
Both Centax and the IFS have proposed closing these loopholes, which also also include the ‘seven year rule’ and investments in private companies or companies listed on London’s junior market AIM, in a move that they claim could raise as much as £4bn.
But doing so would comes with with risks. City traders have warned that removing the provision around AIM investments could wreak “irrevocable damage” to the market, which has struggled to attract investor capital in recent years.
Meanwhile, Family Business UK—an industry body representing family firms—has warned that the move would “pull the rug from under” the types of firms it represents.
National Insurance Contributions
One of the most controversial—but potentially lucrative—rumoured changes is a rise in employer National Insurance Contributions (NICS).
NICs are paid to the government by both employees and employers and are one of the exchequer’s most lucrative levies, contributing over £150bn a year to the public purse.
While Labour’s pledge not to raise taxes on ‘working people’ precludes it from raising the amount employees are made to pay in NICs, they have seen the levy on employers as a potential revenue raiser.
Currently the 13.8 per cent levy on national insurance is only applied to workers’ wages, with firms’ pension contributions exempt from the tax. But Treasury officials are reportedly exploring removing the pension provision, in a move that the IFS has said could raise as much as £17bn.
Several senior ministers—including Starmer, Reeves, and business secretary Jonathan Reynolds—have refused several opportunities to rule out the tax rise, suggesting it is among the more likely to be introduced.
But while the £17bn uplift is the most fruitful of the tax rises outlined in this article, it is also one of the most controversial.
Politically, it could lead to accusations that the government was in breach of its pre-election commitments. The Labour manifesto promised the party would “not increase National Insurance” were it to be elected, neglecting to specify employee contributions.
And it has also been rebuked by several business groups, who argue it would disincentivise businesses from hiring, and hamper growth. Rain Newton-Smith, director general of the Confederation of British Industry (CB) said that “employers see [it] as a difficult move”, especially in the context of recent minimum wage hikes, and planned rises to business rates.
Pension ‘death tax’
A range of tax reliefs exist to encourage pension saving, but a range of think tanks have argued that these reliefs could be made less generous while still incentivising saving.
Reports initially suggested that the Chancellor might introduce a flat rate of tax relief on pension contributions.
Contributions currently attract income tax relief in line with the person’s marginal tax rate, with distributions then taxed as the pot is drawndown.
However, reports suggest she has since dropped these plans because it would disproportionately impacts public sector workers. Many think tanks have also spoken out against the reform.
Still, there are a number of other options still available, most prominently limiting the tax- free lump sum. This allows savers to withdraw 25 per cent of their pension tax-free up to a limit of £268,275.
The Institute for Fiscal Studies (IFS) suggests that limiting this to £100,000 could raise around £2bn per year, impacting only one in five retirees. Reeves is reportedly considering this option.
Pension pots are also not included as part of the estate for inheritance tax, which many think tanks have suggested is irrational. Including them could raise a few hundred million, according to the IFS.