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:1
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.2
- Pension tax relief – £3-15bn. Right now, contributions to a pension are fully tax-deductible.3 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?4. 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.5
- 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.6
- 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 £3bn 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.7
- 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.8 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.9 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 fast10). 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.11
- 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 tax12. 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.13 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.
Footnotes
The source is the latest ONS data. ↩︎
Disclosure: my previous attempt to predict the tax actions of this Government was a dismal failure. So please take with a pinch of salt. ↩︎
Subject to an annual £60k limit, tapering down to £10k for high earners. ↩︎
The 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 ↩︎
We 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. ↩︎
Taxpayer responses, and the complexity of trust taxation, mean that determining the actual yield would be complicated. ↩︎
The 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. ↩︎
Rather unsatisfactorily the source is a private conversation with someone knowledgeable and I can’t provide any further information. ↩︎
Although 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. ↩︎
Those 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. ↩︎
Disclosure: I have an ISA, but not a terribly large one. ↩︎
The 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. ↩︎
But please note the caveat about taking my predictions with a pinch of salt. ↩︎
![[insert here] delenda est avatar](https://secure.gravatar.com/avatar/42cb7df4cc0d309321dae6b83c691c5d9b1736085101e61ba3171c8c2374399f?s=40&d=mm&r=g){kind=avatar}
Leave a Reply to Richard Wilson Cancel reply