Rachel Reeves has said there is a £22bn “black hole” in the public finances, and that she’ll have to raise tax to fill it. Labour are heavily constrained by their pre-election promises, and that makes raising £22bn a challenging endeavour. But certainly not impossible.
So, whilst I’ve previously written about eight tax cuts that the new Chancellor could consider, this article will look at ways in which the Government could raise the £22bn through new taxes, or increases in existing taxes. I won’t go into the political and economic debate over whether these tax increases are necessary or desirable.
There is an updated version of this post here.
The context
How much room for manoeuvre does Rachel Reeves have?
Here’s how UK tax receipts looked in 2023/24 – about a trillion pounds in total:1The source is the latest ONS data.
During the election campaign, Labour ruled out increasing income tax, national insurance, VAT or corporation tax. They’ve committed to reform business rates, so an increase there seems unlikely. Stamp taxes and bank taxes are already probably past the point where more can be raised. Customs duties are complicated by trade treaties. Raising insurance premium tax without raising VAT would be distortive. Raising alcohol duty would be unpopular out of all proportion to its significance. Labour have already planned an increase to oil/gas taxation.
What does this leave? About £150bn of taxes:
It’s going to be hard to find £20bn there – particularly when it’s dominated by council tax and fuel duties, which are politically challenging to increase.
One answer would be radical tax reform – for example replacing business rates, stamp duty land tax and council tax with a land value tax. Most people would pay broadly the same tax as before, but those owning valuable land would pay a lot more. I wrote about that here. Sadly I don’t think this is likely to happen – the poll tax casts a long shadow over anything that affects local government taxation, and some would say (not unreasonably) that the Government has no mandate for such radical change.
Absent radical tax reform, it’s a matter of scrabbling for relatively small tax increases here and there. Here are some ideas, in rough order of likeliness.2Disclosure: my previous attempt to predict the tax actions of this Government was a dismal failure. So please take with a pinch of salt.
- Pension tax relief – £3-15bn. Right now, contributions to a pension are fully tax-deductible.3Subject to an annual £60k limit, tapering down to £10k for high earners. If you’re a high earner, paying a 45% marginal rate, you get 45% tax relief on your pension contributions. Some view this as unfair, and suggest limiting relief to 30%, or even the 20% basic rate. That could raise significant amounts – £3bn (if limited to 30%) or up to £15bn (if limited to 20%). But withdrawals from a pension, after the tax free lump sum, are taxable at your marginal rate at the time. Offering a 20% or 30% tax deduction for pension contributions, but taxing withdrawals at 40%, isn’t a great deal. High earners may shift their investments to other products. There could be complex second and third order effects. I’d say this is streets ahead of all other tax raising candidates given the large amounts that can be raised, and the ease of implementation. But there’s a catch – applying to defined benefit schemes (meaning, in practice, public sector pensions) is more complicated. And exempting defined benefit/public sector schemes from new rules would be widely – and correctly – seen as unfair.
- Limiting inheritance tax reliefs – £2bn. It’s daft that my estate would pay 40% inheritance tax on my share portfolio, but if I move it into AIM shares and live for two more years, there would be no inheritance tax at all. Commercial providers sell portfolios designed solely to take advantage of this. But it’s not just AIM shares – if, like Rishi Sunak’s wife, I hold shares in a foreign company that’s listed on an exchange that isn’t a “recognised stock exchange” then those shares would also be entirely exempt. It’s similarly daft that a private business of any size is exempt from inheritance tax – protecting small businesses and farms makes sense, but why should the estate of the Duke of Westminster pay almost no tax?4The headline and start of the article is misleading – trusts aren’t the reason the Duke of Westminster’s estate paid so little tax – it’s all about APR/BPR. There’s potential for £2bn or more here, for a measure that could fairly be presented as closing loopholes.
- Pensions inheritance tax reform – £1bn. If you inherit the pension of someone who died before age 75, it’s completely tax free. But if they died aged 75 or over, the pension provider deducts PAYE, which means up to 45% tax if the beneficiary takes a lump sum (or less if they drawdown the pension over time). This is a very odd result. Simply applying the usual 40% inheritance tax rules could raise about £1bn (and in some cases would be a small tax cut for beneficiaries of the over-75s).
- Increase capital gains tax – £1-2bn. The Lib Dems proposed equalising the rate with income tax, and said it would raise £5bn. At the time I said that, on the basis of HMRC figures, this would cost around £3bn in lost tax. There is potential to raise some tax from capital gains tax, but it would have to be a modest increase, probably raising no more than around £2bn. A more significant increase would make the UK look like an outlier, and would realistically have to be accompanied by the return of relief for inflationary gains, which would wipe out much of the revenue. And a key point – any CGT increase should be implemented immediately, at the moment it’s announced, or people will “accelerate” disposals and take their gain while the old rate still applies.
- Eliminate the stamp duty “loophole” for enveloped commercial property – £1bn+. It’s common for high value commercial property to be sold by selling the single-purpose company in which it’s held (or “enveloped”). So instead of stamp duty land tax at 5%, the buyer pays stamp duty reserve tax at 0.5% of the equity value or if (as is common) an offshore company is used, no stamp duty at all. This practice has been accepted by successive Governments for decades. It would be technically straightforward to apply 5% SDLT to such transactions, and this would raise a large amount – over £1bn.5We could find no figures that enable a proper estimate to be produced – the £1bn is no more than an educated guess at the lower end of the yield – see the discussion here.
- Increase ATED – £200m+. The “annual tax on enveloped dwellings” is an obscure tax that was introduced to deter people from holding residential property in single purpose companies to avoid stamp duty. As we explain here, it’s currently failing because it’s been set too low, and raises a derisory £111m. There’s a good case for tripling it.
- Increase inheritance tax on trusts – £500m. When UK domiciled individuals settle property on trust, the trust is subject to a 6% tax every ten years, and another 6% charge when property leaves the trust (broadly pro rata to the number of years since the last ten yearly charge). These taxes currently raise £1.3bn, on top of the 20% “entry charge” when property goes into trust. This all seems rather a good deal if we compare it to the 40% inheritance tax paid by estates on property that isn’t in trust. So there’s an argument for increasing the rate from 6% to 9% – and that should raise somewhere north of £500m.6Taxpayer responses, and the complexity of trust taxation, mean that determining the actual yield would be complicated.
- Reverse the Tories’ cancellation of the fuel duty rise – £3bn. For years, Governments have been cancelling scheduled (and budgeted) rises in fuel duty. Most recently, the Conservative Government did that in March, forgoing £3n of revenue. It would be easy to reverse that – but (unlike most of the other tax changes listed here) it would impact people on median/lower incomes.
- Abolish business asset disposal relief – £1.5bn. This is a capital gains tax relief supposedly for the benefit of entrepreneurs. But the Treasury officials forced to create it named it “BAD” for a reason. The benefit for genuine entrepreneurs is limited (a 10% rather than 20% rate). It’s widely exploited. Abolition would raise £1.5bn.7The source for this and the other reliefs are the tables found here – this one is the CGT tab on the December 2023 non-structural reliefs table.
- Council tax increases for valuable property – £1-5bn. It’s indefensible that an average property in Blackpool pays more council tax than a £100m penthouse in Knightsbridge. The obvious answer is to “uncap” council tax so that it bears more relation to the value of the property – either by adding more bands, or applying say 0.5% to all property value over £2m. Depending on how it was done, this could raise several £1bn. The argument seems compelling for any Government, and particularly a Labour government. And whilst Labour promised not to change the council tax bands, that was in the context of revaluation, not adding more bands at the top.
- Increase vehicle excise duty – £200m+. VED currently applies at various rates for different vehicles, depending on the type of vehicle, registration date and engine sizes. The average for a car is about £200. A £5 increase would raise £200m, and raising £1bn wouldn’t be terribly challenging. However it again would impact people on median/lower incomes.
- End the pension tax free lump sum – £5.5bn. On retirement, we can withdraw 25% of our pension pot, up to £268k, as a tax free lump sum. The argument for abolition is that most of the benefit goes to people on higher incomes paying a higher marginal rate. The argument against is that people have been paying into their pensions for decades on the promise of the rules working a certain way, and it’s unfair to now change that (and I agree with this position). Labour also seemed to rule out the change. But it’s another “easy” way to raise lots of tax – limiting the benefit to £100,000 would raise £5.5bn.
- Tax gambling winnings £1-3bn. The US taxes gambling winnings. The UK doesn’t (unless you are a professional gambler so gambling becomes your trade or profession). In theory this would raise £1-3bn.8Rather unsatisfactorily the source is a private conversation with someone knowledgeable and I can’t provide any further information. It would have two ancillary benefits: (1) discourage gambling (in a way that raising betting duties would not), (2) end the oddity that spread betting isn’t taxable when equivalent derivative transactions are. But there are two big downsides. First, it would be (in my view) unfair to tax gambling winnings without giving relief for gambling losses (as the US does). That reduces the yield. It also creates a relief that would be exploited for tax avoidance and tax evasion.9Although one could imagine designing a tax to minimise these effects, e.g. automatic deduction of 40% tax from winnings, with winnings and losses reported to HMRC by regulated gambling businesses, and no other losses permitted. Second, it would in practice be regressive, hitting the poor disproportionately. So, whilst an interesting thought, I can’t see this happening.
- Cap tax relief on ISAs – up to £5bn. Cash and shares/stocks in ISAs is exempt from income tax and capital gains tax. This tax relief costs about £7bn of lost tax each year. Most ISAs are small – only 20% hold more than £50,000. But I expect this 20% receive around 80% of the benefit of ISA relief. So in principle the Government could save £5bn by capping relief for the first £50k (or some lesser amount for a higher cap, with diminishing returns setting in fast10Those who say that ISAs should be capped at £1m are engaging in symbolism not tax policy – there are only a few thousand people with £1m ISAs, and most of those will be only a little over the cap. A £1m cap would raise little.). However many would regard this as unfair – they took advantage of a widely promoted Government saving scheme, and now the rules are being changed after the event. I think that’s a compelling argument.11Disclosure: I have an ISA, but not a terribly large one.
- Reduce the VAT registration threshold – £3bn. There is compelling evidence that the current £90k threshold acts as a brake on the growth of small businesses, as they manage their turnover to stay under the threshold. Reducing the threshold so everyone except hobby businesses are taxed would raise at least £3bn, and in the view of many people across the political spectrum, could increase growth. The economy as a whole would benefit, and small businesses would benefit in the long term. But in the short term there would be many unhappy small businesspeople. I fear this is, therefore, too difficult for any Government to touch. It would also take time to put into effect – APIs/apps would need to be ready to assist micro-business compliance, and HMRC would need to significantly gear up.
- Raise the top rate of income tax – <£1bn. The top rate of income tax (outside Scotland) is currently 45%. The rate was briefly 50% under Gordon Brown – could we return to that? I would be surprised. It raises very little – raising the top rate is a political signal more than it is a fiscal policy. And any increase would probably break Labour’s campaign pledge not to increase income tax.
- Wealth tax – £1bn to £26bn. Many campaigning groups are keen on a wealth tax targeted at the very wealthy – e.g. people with assets of more than £10m. But the practical experience of wealth taxes is that they’ve been failures, with only a handful of countries retaining a wealth tax12The exception is the Swiss wealth tax – but that is charged at a low rate on most people, not just the very wealthy, and so has little in common with the campaigners’ proposals.. The recent Spanish tax – which adopted the modish idea of only hitting the very wealthy – raised a pathetic €630m. It’s another failed wealth tax to join a long list. The academics on the Wealth Tax Commission recommended against an annual wealth tax, but supported a one-off retrospective tax raising up to £260bn over ten years. My feeling is that such an extraordinary tax would require a specific political mandate, which Labour do not have. And one-off taxes have a habit of not in fact being one-offs
The last six seem unlikely to me.13But please note the caveat about taking my predictions with a pinch of salt. Implementing all the others should raise around £22bn (if pension tax relief was capped at 25%).
Official portrait of Rachel Reeves © Chris McAndrew, released under an Attribution 3.0 Unported (CC BY 3.0) licence.
- 1The source is the latest ONS data.
- 2Disclosure: my previous attempt to predict the tax actions of this Government was a dismal failure. So please take with a pinch of salt.
- 3Subject to an annual £60k limit, tapering down to £10k for high earners.
- 4The headline and start of the article is misleading – trusts aren’t the reason the Duke of Westminster’s estate paid so little tax – it’s all about APR/BPR
- 5We could find no figures that enable a proper estimate to be produced – the £1bn is no more than an educated guess at the lower end of the yield – see the discussion here.
- 6Taxpayer responses, and the complexity of trust taxation, mean that determining the actual yield would be complicated.
- 7The source for this and the other reliefs are the tables found here – this one is the CGT tab on the December 2023 non-structural reliefs table.
- 8Rather unsatisfactorily the source is a private conversation with someone knowledgeable and I can’t provide any further information.
- 9Although one could imagine designing a tax to minimise these effects, e.g. automatic deduction of 40% tax from winnings, with winnings and losses reported to HMRC by regulated gambling businesses, and no other losses permitted.
- 10Those who say that ISAs should be capped at £1m are engaging in symbolism not tax policy – there are only a few thousand people with £1m ISAs, and most of those will be only a little over the cap. A £1m cap would raise little.
- 11Disclosure: I have an ISA, but not a terribly large one.
- 12The exception is the Swiss wealth tax – but that is charged at a low rate on most people, not just the very wealthy, and so has little in common with the campaigners’ proposals.
- 13But please note the caveat about taking my predictions with a pinch of salt.
88 responses to “How could Rachel Reeves raise £22bn of tax?”
Very late to this but – could we raise substantial revenue from a ‘proper’ carbon tax? Feels like if we could do so and cut taxes on things we don’t want to discourage (like work) it would be very pro-growth…
As a farmer, I hope there isn’t a land tax, as the Labour government will shut down food production in this country. Its difficult enough to compete with imports as it is. I would hope farming would be an exemption.
If land can only be used for farming then by definition land value tax would apply as some very small proportion of the economic value of the land for farming. So it certainly wouldn’t “shut down food production”.
>Overall, Spain raised more than 1.8 billion euros in 2023 in taxes on large fortunes.
most of that is its longstanding wealth tax, which applies much more widely.
In addition, what could be achieved through a sugar or junk food tax? It may not raise a great deal of revenue but welfare/ NHS savings could be made from the public health benefits from reformulation or reduced consumption so it seems like a win/win.
Here are a few Revenue raising ideas:
a) abolish Inheritance Tax and replace it with a Capital Acquisition Tax with a lifetime allowance, such as in Ireland
b) apply national insurance to close company dividends
c) apply national Insurance to all wages and salaries not just those below state retirement age – we all use the NHS
d)tax dividend income at normal rates of tax – they have long ceased to have any proper recognition that the income has already been taxed
e) remove all tax benefits from private schools unless they are genuinely charitable – say more than 50% non fee paying.
How would capping pension relief interact with the tapering of the personal allowance? For a lot of people earning e.g. £110k its likely to make sense for them to pay 10k into a pension rather than pay away £6k in tax. Would capping pension relief mean pension contributions are still deducted from taxable income?
Not all taxes but:
1. remove the freedom transport pass in London for OAPs – keep only for the lower earners.
2. Remove the free NHS prescriptions for certain diseases – eg type 1 diabetes, and keep for lower earners only.
3. Remove tax exemptions on employee share schemes.
4. Charge high earners for state school places.
5. remove free lunches for children at primary school for high earners.
6. charge VAt on some zero rated products eg cakes, takeaway food etc
I agree re freedom passes, suggest that all benefits should be means tested. eg winter fuel payments, free TV licences, free prescriptions.
means tested means more crazy marginal rates… not a great idea.
Sorry but removing free prescriptions for type 1 diabetes is crazy. It would likely place a particular squeeze on the finances of those T1D’s on modest incomes, who sometimes cannot afford prescription medicines – a price that’s ultimately paid in preventable hospital admissions, wasted NHS time, avoidable sick leave and ultimately premature death due to complications if diabetes is uncontrolled with insulin…should really be investing more money in preventing poor control of HbA1c – renal disease and treatment is VERY expensive.
“The US taxes gambling winnings. The UK doesn’t (unless you are a professional gambler so gambling becomes your trade or profession)”
I am not aware of a single UK pro gambler paying tax on their winnings due to it being treated as carrying out a trade.
Technically it could still happen one day, but HMRC’s position for at least the last two decades has been underpinned by this:
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim22017
It is not unknown for HMRC to make life very difficult for professional gamblers by freezing their assets, for many months with next to no explanation.
But these were money laundering investigations, HMRC were not interested in trying to tax the winnings. My impression is their starting point is to assume you’re lying if you say you are a professional gambler, and once you’ve proven you really are, they simply let you go.
that’s very interesting. Strictly speaking it’s wrong – a professional gambler, i.e. someone who makes a living from gambling, absolutely should be taxed on their livings. I wonder if this is a calculation by HMRC that most people who claim to be professional gamblers in fact lose money, and HMRC would lose out if it relieved their losses more than it would gain by taxing their winnings?
I agree it should be taxable. In the US gambling losses are tax deductible, but only against your winnings, if you have any. A recreational punter losing regularly doesn’t get any tax relief.
The argument that if you tax winners then you have to give tax relief to losers has never been true, but I have heard UK based accountants argue it for many years.
HMRC did look in some detail as to how pro gamblers were operating on Betfair (somewhere around 2007 or so?) as they were considering if and how they might tax them. The upshot of their time spent in Betfair’s offices was they decided to leave it.
Big winners on Betfair have had to pay something called Premium Charge since 2008. It felt a lot like paying tax! In theory this charge does inflate Betfair’s profits which might result in a higher amount paid in corporation tax, but it’s hardly the same thing as HMRC taxing the gambler.
The wealthiest pro gambler in the UK that I am aware of has a reported estimated net worth £1.3bn or so. His betting syndicate headhunts talent from around the betting industry, he used to call it the millionaire factory – back when a million put you a lot higher up the ladder than it does now.
Not many in his league, but there’s a decent handful who have made tens of millions, some have written books about it.
How about expanding section 24 so that it applies universally, rather than the current mom/pop landlords, would raise money and get the housing market moving?
You mention capping ISA tax relief however you don’t mention capping the annual amount. At £40k per annum of taxed income for a couple this implies that couple already enjoy salaries significantly higher than the average earner and I question the reasonableness of continuing this tax advantage. In response to your comment about not changing the rules after the event, I agree (albeit there are plenty of exceptions to that rule) and think it would need to be phased in over a period of at least 2 years, preferably 5. IT has always perplexed me why anyone would put £20k in a building society account rather than £20k in an ISA when one is taxed at source while the second is not.
It doesn’t necessarily imply high salary income – there could be other sources for the funds maxing out ISA allowances, inheritances and asset sales to name but two (I’ve done both myself).
I don’t mind the idea of capping the relief though the base cost (for stocks and shares ISAs) would have to be determined, and a lot of tax returns would become more complicated.
I would dispute that those putting the maximum into ISAs are impliedly doing so out of high employment income. Drip feeding an inheritance or proceeds of asset disposals at the rate of £20k a year cannot be uncommon. It’s a legitimate position that the annual ISA allowance should be reduced though given the tax relief is on the earnings not the balance, I do wonder how much impact that would have on tax take, certainly in the short term. Unlike saying that income and gains over a certain threshold are taxable.
I’m not so sure the “moving of the goalposts” argument is that compelling re ISAs. Surely the same could be said of any of the other tax changes – they’re likely to affect somebody who had made decisions in the past based on tax rules as they then applied.
Take BADR for example – that would apply to all gains made henceforth. But could you not argue that people are losing out on a relief that they thought they would benefit from when they bought the asset?
I guess it does lend an argument to phasing in any maximum investment limit, but not for making no change.
RE: CGT
HMRC’s own estimates (of June 2024) show a 10% increase in the rate reducing collection by cumulatively £3.5bn in FY26, 27 and 28. I can’t comment on the accuracy of the calculation but I do wonder what the OBR forecast would be and how that would impact Labour’s ability to do this and show increasing revenues.
See section 13 of this report for details:
https://www.gov.uk/government/statistics/direct-effects-of-illustrative-tax-changes/direct-effects-of-illustrative-tax-changes-bulletin-june-2024
How much would they save by ceasing to pay the UK state pension [or perhaps freezing its value] to retirees who have moved and taken up residency outside the UK?
Would they dare to do it?
That has been floated in France as well. There too, it has not got much traction because it is recognised as completely unfair on the people who have earned that over their working lives. At least in the UK it would be constitutional, clearly, but still quite unfair – unlike most tax changes that would really be retrospectively changing the terms on which people were operating.
Betting tax used to be collected via the bookies. When placing a bet off-course, you could opt to pay the “tax” upfront (10 percent of stake) OR on your winnings (again, 10 percent, but on a potentially higher value). Optimists paid up front! It always used to be referred to colloquially as a tax but perhaps levy might be a better term? It certainly had the advantage of being straightforward at point of use.
Really interesting analysis.
Does anyone know how much the income tax personal allowance taper raises? The high marginal rate (60%) because of the taper must be an incentive to reduce net pay (either working less or more likely paying more into a pension).
To keep to the letter of the manifesto promise could you reduce where the taper kicks in to say 80k but graduate the taper more to effectively get the marginal rate to c45%?
Would this raise revenue and also remove the disincentive for anyone earning between £100k-£125k to increase their earnings?
LVT makes most sense, and incidentally could be presented as a limited wealth tax, so it definitely won’t happen.
I think Dan has said that a way to do it is sneak it into Council Tax which is a great idea
Can someone explain the impact that reducing pension tax relief would have on a public sector DB arrangement if the employee goes from 40% relief to a lower rate? Would this mean a reduction in take home pay, or in the value of the pension, or both? And by how much? I am very confused!
Apologies if this appears twice as I couldn’t see a preview. Hence reposting
I dont think it is very accurate to describe pensions as fully deductible. The annual allowance is a ceiling and this is tapered quite severely once you exceed certain (admittedly) high income levels. At the moment you are implying that you could contribute a cool quarter million (or more!) and laugh all the way to the bank…
thanks – I’ll add a footnote!
I think it’s slightly misleading to refer to pension contributions as being fully deductible. The annual allowance represents a ceiling and this comes down significantly for the really high earners. At the moment you are making it sound as if you could drop a cool quarter of a million into it and laugh all the way to the bank…
Shouldn’t National Insurance (employee and employer) be equalised for all people regardless of whether they are employees or partners for the big accounting, law and consulting firms? That would raise >£2bn! Seems like a quick win and it’s just increasing the marginal tax rates of the best paid people inline with other higher rate tax payers. Is there a problem with doing that technically?
If you are going to do that, then presumably PAYE would be due on drawings from large firms too.
And if that doesn’t happen: (i) apply the salaried member rules to non-UK LLPs, (ii) get rid of Condition C, and (iii) make sure that profits from the overseas firm are NICed in the UK and that the remittance basis doesn’t apply.
All good and worthy options. How about merging NI with income tax and increase the income tax rate? Keep the same overall rate but bring in all the retirees / none salaried income in to a higher basic tax rate matching the combined income tax and NI. Realise there were logistical issues when Osborne tried to do it but would raise a lot more money while keeping tax on working people the same.
Also I don’t buy your line on no mandate for radical tax change relating to land value taxes. Labour in its manifesto said it would replace Business Rates but not explaining with what, so has some mandate. In the past I think they were keen on LVT. Equally local councils are facing a financial crisis so why not be brave now and go with a LVT, property value tax?
Agree – don’t think taxing gambling winnings is going to work. Putting aside the inequity in not allowing losses as deductions how in practice would it work. Is it an annual tax requiring all “gamblers” to keep records. Is it net after losses? What is gambling, eg lottery v roulette, bingo v blackjack? How to ensure compliance? Is there a de minimis limit?
Reducing pensions tax relief, whilst on paper looks simple, is a fiendishly difficult proposition when it comes to providers implementing this.
Pensions Policy Admin systems are sensationally complex beasts fuelled by years and years of legislative tinkering.
Providers are already trying to grapple with pensions dashboard, and numerous other mandatory edits.
Policy Admin systems are often sprawling beasts across different systems, platforms, and programming languages. 40 year COBOL systems are not uncommon.
The complexity of this change doesn’t just extend to providers. It places an onus on employers to rejig and reorganise their schemes.
Making these changes industry wide might take years and years.
And then there’s the risk of the growing generational divide. The younger who can’t retire till 68 already see the retired generation having had gold-plated final salary schemes that afforded them retirement in their early 60s. They see generous triple lock handed out to the 1 in 4 pensioners that are asset millionaires. This will not sit still with those, and will also place extra pressure on the government to end triple lock to balance fairness.
And let’s not forget that these things are only more enticing because of fiscal drag over the last few years. More people have been pulled into the 40%/42% tax band, so it makes sense that more will be entitled to the benefit. You yourself have pushed this point in the past when arguing against HICBC.
Oh, and whilst we’re on 42%, naturally, this approach with hot Scottish taxpayers harder and more disproportionately.
In short, removing tax relief on pensions is nightmarish complex to implement, brutally unfair, and will have so many unintended consequences that makes it a really bad choice.
You once said on a DM to me on twitter that you knew nothing about pensions. Would you be able to accept the argument of someone that does?
Dropping the tax relief on contributions for higher and additional rate taxpayers wouldn’t be an issue for the pensions industry at all.
Such taxpayers have to claim the relief from HMRC who could simple set their computers to “No”.
That’s not the case with schemes that operate on a net pay basis (such as the millions of members of public service pension schemes).
I’ve spoken to John Ralfe and others, and they don’t regard these difficulties as particularly hard to overcome.
No-one has come up with a method of applying this to defined benefit schemes that is both practical and also fair. You can have one or the other, most people would probably say you need both before implementing it.
The suggestion of applying the approach used to calculate Annual Allowance charges is maybe just about workable (but it would be a lot of work and potentially bring millions more people into self-assessment or something similar), but it would involves a level of unfairness that is unjustifiable.
As it stands, the existing AA regime can result in tax charges for people with have seen no real pension accrual over a tax year. Bad enough when dealing with the highest earners, completely unacceptable when dealing with fairly ordinary workers like nurses and teaching assistants etc.
To iron out this unfairness would require a level of complexity that is surely unworkable.
Why is there so much emphasis on increasing tax, rather than *collecting* tax?
E.g. the article published on the 22nd June: “HMRC’s failure to close the small business tax gap costs £15bn/year” (https://taxpolicy.org.uk/2024/06/22/hmrcs-failure-to-close-the-small-business-tax-gap-costs-15bn-year/)
£15bn/year left on the table because HMRC doesn’t crack down on small business tax evasion. Even collecting 75% of this figure would close 50% of the £22bn black hole.
I’ve written about how realistic it is to collect more by closing the “tax gap”. Labour already book £5bn of revenue from this, and that’s ambitious.
If tax relief on pension contributions was limited to 20% then wouldn’t most higher/additional rate taxpayers simply move over to salary sacrifice?
That means the Treasury would lose out on the employers and employees NI charges.
(TBH I don’t know why this isn’t already the case)
I assume they would need to abolish salary sacrifice as an option.
Doing that would more than likely cost more than it would take in. Right now administration sits with companies and the tax gap is smaller because of it. With a sudden change of millions of people now claiming deductions via tax returns the opportunity for the tax gap to grow increases dramatically.
40% IHT over an allowance which is reduced year on year in real terms is a particularly egregious tax; the loopholes are all there for reasons and if loopholes are abolished, the rate should be reduce to something less unreasonable.
Ultimately the older generation will have to foot the bill for Labour kowtowing to trade unionists and having liberal immigration policies. How it happens – pensions tax changes, CGT, IHT, council tax etc – is just detail. Important detail for those upon whom the taxes are levied.
“liberal immigration policies” provide a supply of fit young working people to fund pensions.
Why isn’t putting employee and employer NI for LLP members on your list? It’s odd that partners at law/consulting/accounting firms pay lower marginal tax rates than their juniors, and by your maths could raise £2-3bn
It has become a norm that incoming governments lay the blame on previous government. Ground is then prepared for tax rises with a promise to milk and honey in 4-7 years time down the line. When we had the vat hike from 17.5 to 20, the pledge was that budget will be balanced by 2023. I think it’s high time that responsibility is fixed as to who is not telling the truth and whether or not 20 billion black hole exists. The person responsible shall be made an example for the future generations so that the county can atleast balance out of the ongoing spiral dive.
Isn’t the 20% entry charge and 6% ten yearly charge on trusts intended to equate to the 40% death charge over each generation?
Three points on your excellent note
1. There is serious evasion in “cash only” and similar SMEs. Beefing up HMRC with extra resources with a mandate to go after these people would be seriously cost effective.
2. Deduct BR income tax at source from bank interest – and drop the £1,000 exemption.
3. Is [email protected] on the mail list? 🙂
On your points:
1. That’s the point of Making Tax Digital. However the vastly different treatments different firm types get under it means that it becomes a complex behemoth. A simplified implementation of it would be far better and leaves little room for error, omission, avoidance, and potential evasion. In todays form it’s an in process initiative that is being ruined by large company input.
2. This used to be the case with CT61’s which also meant there was a complex process to claim no BR deduction via an R form (can’t recall the number) to claim interest to be paid gross. It also made filing tax returns more complicated. In reality the CRS regime means that gross interest is actually reported to HMRC globally, they just haven’t bothered to integrate this into their MTD processes (one senses the project management there is poor)!
Thanks for this practical list packed with financial and political insights. I would love to see a similar chart of US tax revenues. One other idea: promote whole food plant based diets through public service announcements and education to see reductions in NHS expenditures.
Tax relief at 45% or 40% on pension contributions for some while others get only 20% is only “unfair” if being charged marginal income tax rates at 40% and 45% rather than 20% is also “unfair”
A 20% taxpayer would keep £80 of every £100 income they didn’t pay into a pension today. 40% and 45% taxpayers would keep £60 and £55. Is that “fair”? All of them paying £100 gross income into a pension will see their pension pot go up by the same amount: £100. That is fair, in my opinion
(Ignoring National Insurance, of course, but with Salary Sacrifice the tax relief for 20% taxpayers is actually 28%)
Limiting corp. tax relief on debt esp. for financial firms.
To limit their dangerously high gearing.
(see Bankers’new Clothes A Admati et al)
for corporates makes some sense, but for financial firms? I don’t understand. Banks receive interest income, and pay out interest expense. How/why would one make the interest non-deductible?
@Dan
I believe this is an enhancement of the current Corporate Interest Restriction regime that already exists (or they aren’t aware of it already). I agree that high gearing through heavy debt funding is a major problem and leads to instability. Attacking PE houses via this route might be easier by restricting the gearing level further as a simple reorg of the investment structure(and a shift of the individuals overseas) will eliminate CI subject to UK tax. I’d rather have 28% of something rather than 45% of nothing. Limiting interest expense further may result in a bigger tax take.
Re the CIR they should eliminate re-activations and just give you a greater amount of brought forward unused interest allowance. The whole concept of reactivations undermines the CIR and abolition would simplify matters.
Not a straightforward solution, but perhaps the UK could take a leaf from the EU’s Debt Equity Bias proposals, while further restricting interest deductions under the Corporate Interest Restriction. There are good macro economic and policy basis.
A very helpful list – I hope someone in government reads it. I would add a few others, not large sums individually but more significant in aggregate and, crucially, remove unjustifiable distortions in the system:
1.Treat all “workers” as “employees” for e’ers and e’ees NI
2. worker platforms (e.g. uber, deliveroo) to apply a 10% withholding tax on service earnings so tackling widespread tax and benefit fraud in the gig economy.
3.scrap the NI employment allowance which is so abused.
4. End the NI exemption for pensioners.
5. Use the extra e’er’s NI raised by the above measures to cut the e’ers NI from 13.8% so the impact is neutral overall on business
5. subject short term lets in residential accommodation with an RV below £15k to Council Tax rather than business rates from which they are exempt.
6.Make income from ISAs in excess of, say, £5,000 per annum subject to Income Tax.
The elimination of the 60% marginal rate back to 40%, via restoration of the personal allowance would likely be revenue generating. As it stands today it acts as an earnings block, similar to the £90k VAT threshold. Eliminating it, rather than costing £2bn as the bureaucrats think, is almost certain to boost revenues by at least £2bn overall.
Your point 6 would be political suicide (and would likely also hit the politicians themselves!) The most likely may be a reduction in the ISA allowance leaving more savings exposed to interest tax / CGT.
Hi Dan, can I just clarify – is that 10 year 6% tax on property in trusts for anything over the £325k threshold, the same as thr 20% enyry tax?
No, it’s in addition.
For good reason IHT is a widely disliked tax, particularly given that estates liable are often relatively modest and were accumulated from funds previously taxed and then increased through personal thrift.
We have IHT reliefs for good reason and the impact of curtailment must be carefully studied, particularly the ongoing viability of the UK’s AIM market which allows small, younger and sometimes riskier companies to raise funding and its secondary market, which already lacks liquidity, needs investors who are in part attracted by the tax benefit. AIM would be fatally wounded with the removal of BPR which is already not guaranteed (it’s assessed at the point of probate not investment).
Wouldn’t it be simpler, more equitable, and less harmful to limit the amount of relief individuals might claim? Lets say to £1m?
We also need to consider the interaction of IHT and CGT, with some estates enjoying the double benefit of receiving 100% BPR relief and also seeing seeing business assets costs re-based to market value, meaning CGT liabilities are cut for inheritors. Of course you can’t levy both IHT and CGT (double tax), but nor should someone be relieved of both.
Very few estates are subject to IHT! But there is an unfairness in that property values are greater in the south of the country.
Excellent analysis Dan, as always.
– Is the Norwegian Wealth Tax not generally seen as successful/useful?
– Apologies if you have covered before, but it would be interesting to cost out a phased replacement of Principal Private Residence Relief and Stamp Duty with CGT less indexation allowance. Even if not raising more, benefits would be to shift the burden from first time buyers (so Help to Buy could be abolished), increase liquidity, and encouraging workplace mobility and investment in renovations.
Thanks!
not according to the Guardian: https://www.theguardian.com/world/2023/apr/10/super-rich-abandoning-norway-at-record-rate-as-wealth-tax-rises-slightly
It would be interesting to see if road pricing ever gets a look in. With electric cars reducing fuel duties over time, there will be another hole coming up.
Agree but think the short term answer will have to be introducing Vehicle Licence Tax for EVs – I say this as an EV owner. We still use the roads and while a zero CO2 band could still be lower than the typical petrol car, it’s overdue to start plugging the revenue hole.
Using Dan’s numbers, vehicle tax raises £5bn and fuel duties raise £25bn. I guess that £25bn increases because of the extra VAT (e.g. £30bn in total) but that’s just a guess.
In 2022 the government announced changes to taxation of electric vehicles and thought it would raise £1.6bn per year by 2027/28. Presumably this will go up pretty much in line with the decrease in tax on petrol/diesel vehicles. If that is right, the £25bn to £30bn fuel duty looks vulnerable.
To truly solve this, a longer term plan is needed. A large part of that plan will absolutely consist of significant investment, to increase output and productivity.
If the amount of money swirling around to be taxed does not grow, but the government keeps insisting it needs to collect more, the only way is for taxation rates increase.
We can keep taxes at our current rates, or even reduce them, if we can increase our productivity. That will come from said investments.
A large part of the problem is the sheer waste we have in this country. We could do with more granular data, seeing exactly what each tax pound is spent on. And if we don’t like it, we can object to it. We – the tax payers – should be the judges of what is value for money.
I have to say this all feels very vague.
For good reason IHT is a widely disliked tax, particularly given that estates liable are often relatively modest and were accumulated from funds previously tax and then subject to personal thrift.
We have IHT reliefs for good reason and the impact of curtailment must be carefully studied, particularly the ongoing viability of the UK’s AIM market which allows small, younger and sometimes riskier companies to raise funding and its secondary market, which already lacks liquidity, needs investors who are in part attracted by the tax benefit. AIM would be fatally wounded with the removal of BPR, already risk and not guaranteed (its assessed at the point of probate not investment).
Wouldn’t it be simpler, more equitable and less harmful to limit the amount of relief individuals might claim? Lets say to £1m?
We also need to consider the interaction of IHT and CGT, with some estates enjoying the double benefit of receiving 100% BPR relief and also seeing seeing business assets costs re-based to market value, meaning CGT liabilities are cut for inheritors. Of course you can’t levy both IHT and CGT (double tax), but nor should someone be relieved of both.
Local government is an appalling postcode lottery
LAs have had so many essential statutory duties dumped on them which was deliberately discriminatory & detrimental to the most vulnerable areas with governments doling out money under often bizarre schemes
Could council tax be replaced by a fixed rate local income tax and allocated according to statutory need fulfilment?
HMRC already have much of the data required
LAs could still be allowed to hold local votes to raise additional funds for non-statutory expenditure.
If council tax is a local tax intended to pay for local services, then surely comparisons between different parts of the country are difficult as local voters can choose to elect councillors with different views on spending?
Including more bands at the top into which very view Blackpool properties will fall does not raise any material extra cash for Blackpool council. And in London while it will raise more, there is presumably a local choice to either keep total revenue constant by reducing Council Tax at lower bands or increase local service provision.
Similarly applying 0.5% on all properties above £2m will do nothing for most local authorities but raise a lot for London councils. If this is intended to be redistributed across the country, then is it not really a form of wealth tax, rather than having anything to do with Council Tax?
Hi Dan, on inheritance tax, does it not make more sense to tax not the estate as a whole but to treat it as it it were a sale and therefore subject it to CGT? So for instance, if my house is worth £1M and I bought it for £0.3M, the tax to be paid would fall on the £0.7 gain and not on the whole estate. This would avoid double taxation but would probably also mean revising the whole CGT system. Thanks
Hi Dan, thanks for this.
There has been a lot of commentary suggesting higher and additional rate tax relief may be withdrawn.
I would be interested in an analysis of how this would affect public sector DB pensions, where the nominal value of employer contributions can be significant – and the true value is potentially much higher than what is declared given the promises made by the scheme are not actually funded by the contributions.
Would DB recipients be taxed today on benefits they are accruing but may never realise (eg due to early death)? Or would it play out as a cut in pension entitlement?
(Surely the civil servants and MPs setting the rules, who all benefit from DB schemes, would not shield themselves – that would be scandalous.)
Scotland has almost gone back to the 50% tax days. Latest is 48% for over £125k. Our thresholds are also lower. For high earners it’s about £7k/year extra tax being paid over the rest of UK.
Starter £12,571 – £14,876 = 19%
Basic £14,877 – £26,561 = 20%
Intermediate £26,562 – £43,662 = 21%
Higher £43,663 – £75,000 = 42%
Advanced £75,001 – £125,140 = 45%
Top Above £125,140 = 48%
What effect would it make if all the UK was on the same tax bands as us?
I’m overdue writing about the Scottish tax bands. The top band is amazingly inefficient in how much it collects, with about 80% of the “static” revenue in fact being lost.
Does the government get council tax receipts?
Otherwise your suggestion would just mean that the council that covers Kensington would just have a load more dosh, while Blackpool’s would still be strapped for cash.
Most of the revenue of councils comes from grants from central government allocated according to a complex (and obscure?) formula. It would be entirely feasible to adjust the formula to share out the benefits of a new council tax band.
You’re right in that it has to go hand-in-hand with a reform of central government funding of councils, so that the support falls for councils with lots of income from higher band properties and is redirected to those with mostly lower band properties. Full disclosure, I live in Kensington & Chelsea and accept it is grotequely unfair that I pay less for my Band G flat than a Band D house in most of the country.
I think it is possible that announcing a fairly significant increase in CGT effective from 6 April 2025, and bringing forward the date of CGT payment from 31 January 2026 to 31 July 2025 for gains in the current year could create a very substantial increase in revenues. Many people would accelerate disposals in order to benefit from the lower current rate. Maybe eliminate BADR from Budget day. Obviously CGT receipts from disposals in 2025/26 could plunge as a result, but a year ins a long time in politics.
On inheritance tax on pension funds, wouldn’t your proposal create another distortion and inequality of treatment between DB and DC schemes? Survivor benefits in DB are taxed on recipient as they receive and not subject to IHT. Your proposal I think would further distort situation and privilege further those in receipt of DB?
Reducing tax relief on pensions creates a big problem with public sector schemes, especially with highly paid doctors in the NHS scheme. The lifetime allowance was abolished and the annual allowance increased to £60,000 purely to stop senior doctors retiring or reducing hours but the complexity of a carve out for them and the perceived unfairness meant it was applied to everybody. I’m not sure how you can solve that problem without creating a very unfair system for the private sector employees who have already been battered by Gordon Brown’s £5 billion a year raid started in 1997.
Taxes for beneficiaries drawing an income from a drawdown plan are at a beneficiaries marginal rate of tax if the pension holder dies after attaining age 75. (Lump sums are at 45% but you would choose one off income rather than a lump sum). There are interesting scenarios around paying a lump sum in to trust using Bypass trusts- but often the 45% tax is a hindrance).
Will more people using the overseas transfer allowance to transfer overseas to access tax free cash in an overseas jurisdiction? I head Dubai is popular as you may be able to take 100% tax free (and earlier than UK).
I agree that they’ve created a real problem for themselves in terms of the Doctors etc, but wasn’t the adoption of IAS 26 as big a nail in the coffin of traditional pension schemes as the abolition of imputation/ACT?
Personally I’m disgusted at the horrific blunt instrument of abolishing the winter fuel allowance so that only those on pension credits receive it. There are literally millions of very poor pensioners (many of them very elderly widows) receiving the basic pension and maybe a tiny top up via SERPS entitlements from their dead husbands. These people have no private provision, have to pay income tax but are not eligible for pension credit. They have had their winter fuel benefit snatched from them in a gesture that would make Osborne blush.