The Angela Rayner tax proposals – how much sense do they make?

Angela Rayner’s leaked tax memo to Rachel Reeves outlines a raft of new revenue raisers. In this post, I look at each proposal, and ask whether it makes sense, and whether it would raise the claimed amount.

The original report from the Telegraph sets out the detail of the memo – see also coverage from the FT here and the BBC here).

My take is that about half the proposals make sense from a policy perspective (if we want to raise additional funding) and could raise £1.5bn.

The Good

Close the commercial property stamp duty loophole – £1bn

We all pay stamp duty land tax if we buy residential property. Commercial property is also subject to stamp duty, at the lower rate of 5%. But in practice it’s often avoided by the simple method of putting the property in a company, and selling the company instead of the property.

This barely qualifies as a “loophole” because it’s such a standard way of selling real estate, and successive Governments have accepted it. Tax legislation prevents outright abuse (e.g. moving real estate into a company and then selling the company right away) but doesn’t prevent it.

I wrote about the issue here, and guesstimated that the yield from closing the loophole would be around £1bn.¹Unfortunately we lack the data to come up with a proper estimate. There is good data on commercial real estate transaction volumes (about £40bn in 2023) but the HMRC figure for non-residential stamp duty revenue (about £3bn) can’t be directly compared, because the scope of SDLT is much broader than the commercial sales tracked by BNP and others. for example: the £40bn figure is high-value purchases only (£1m+). The HMRC figure includes all purchases, plus lease extensions and other non-purchase transactions. And the £40bn is only actual commercial real estate; the HMRC figure includes agricultural transactions, mixed transactions, and purchases of rental property portfolios (because of the multiple dwelling relief exemption, now abolished). So we can’t calculate the “missing” SDLT by comparing these two figures.

Stamp duty is a terrible tax, and I’d much rather abolish it. But if we’re to keep it, it’s only fair it should apply to everyone. This is a good way to raise a useful amount of money.

Increase the annual tax on enveloped dwellings – £200m

People used to use the same “loophole” when buying residential property, until it was somewhat closed in 2013. I say “somewhat” closed because, instead of simply charging stamp duty when people bought a company containing residential property, such “enveloped” real estate became stung with an annual tax – the “annual tax on enveloped dwellings” (ATED).

But there’s a quirk: ATED is only slightly proportional to property values. This is effective at discouraging “enveloping” for relatively low value real estate, but not at all once we get into seriously valuable property. We can compare the effects with this chart:

So ATED is too low to do the job it was designed to do. The enveloping “loophole” is still worthwhile, and the more expensive the property, the more worthwhile it is.

The sensible solution is to close the loophole properly, and make stamp duty apply on the sale of companies holding residential real estate (just as I think we should for companies purchasing commercial real estate). But if we don’t want to do that (or want a stopgap while we finalise how we’re going to properly sort things out), let’s just increase ATED.

I wrote about this here, and suggested that tripling the rate would raise around £200m.

Remove the inheritance tax exemption for AIM shares – £1bn

There has, for years, been an inheritance tax exemption for holdings of private businesses – business relief.

Business relief is usually justified by a desire to prevent family companies from being broken up when the founder dies. Much harder to understand is why the exemption extends to most shares listed on the Alternative Investment Market (AIM). It’s a pure subsidy for a not very successful stock market. And it created an amazing avoidance opportunity: buy a portfolio of AIM shares (or pay someone else to do that for you), live for two years, and escape inheritance tax.

Business relief (including AIM relief) was somewhat restricted in the Budget – only the first £1m is completely exempt; remaining holdings are 50% exempt and 50% taxed.

So AIM shares remain a good inheritance tax avoidance opportunity. The Rayner memo is right to identify this as a problem.

But the reported £1bn revenue estimate in the memo is not correct. The whole of business relief cost £1.4bn, prior to the Budget, and the Budget changes removed about a third of this. So abolishing business relief would probably yield around £1bn, and that may be where the £1bn figure comes from.²Although there would likely be significant tax planning/avoidance in response, reducing the yield. But Ms Rayner isn’t proposing that – she’s proposing abolishing AIM relief. Given the reduction in AIM relief raised £110m, we’d be looking at around £100m rather than £1bn.

Remove the dividend allowance – £325m

We all have a personal allowance of £12,570 (it’s reduced for those earning £100k, and eliminated for those earning £125k).

We also have a £500 dividend allowance – dividends on shares held outside ISAs and pensions would normally be taxed; but the first £500 is tax free.

The Rayner memo proposes eliminating it, and says that would bring in £325m. The figure comes from the HMRC “ready-reckoner“, which estimates changing the allowance by £100 yields £65m – they’ve multiplied £65m by five. That won’t be quite right³The “ready-reckoner” is really only good for small changes; completely abolishing the dividend allowance will likely not have the same result as five times a 20% reduction in the allowance. For example: we may see a greater taxpayer response (as was seen for previous changes), reducing the yield. The distribution of dividends may be non-linear, i.e. with lots of people receiving just a few £ of dividends each year, increasing the yield. Administrative costs may increase once very small amounts of dividends are taxed, reducing the yield., but should be a good approximation.

The dividend allowance was introduced at £5,000 in 2016 (£6,800 in today’s money), and then cut by a series of Budgets, eventually to £2,000. Eliminating the allowance altogether is the obvious next step.

I would however pause to check whether there are people receiving a very small amount of dividends, and the administrative cost (for them and HMRC) of making them file tax returns will be disproportionate. Possibly a dividend allowance of £100 makes more sense than no dividend allowance at all.

The not so good

Reinstate the pensions lifetime allowance – £800m

The pensions lifetime allowance was a £1m cap on the total amount of tax-exempt pension savings an individual could build up in their lifetime without incurring extra tax charges.

The lifetime allowance was abolished by the Conservative Government in 2023. Labour had previously pledged to restore it, but changed its mind in June 2024.

£1m sounds like a lot of money – and it is. But many people want to use their retirement savings to buy an annuity guaranteeing retirement income. In 2023 the level of annuity rates meant that £1m would buy a couple a pension of £40,000/year. This isn’t oligarch territory. And it’s hard when you’re (say) 50 to plan retirement savings in a way that avoids hitting a particular number in fifteen years time.

But none of these are the reason Labour changed its mind. The reason was simple: doctors.

Senior NHS doctors have a “final salary” pension scheme, where their annual pension is calculated as the years they worked multiplied by their final salary. As this calculation approached the £1m cap, doctors had a powerful incentive to work fewer hours to avoid hitting the cap (and the 55% tax that resulted).

At one point Labour suggested special lifetime allowance rules for doctors. But that looked unprincipled and unfair – other highly paid professionals faced similar problems, and no tax rule should encourage people to turn away work. There is a good IFS analysis here of the issues around reintroducing the annual allowance.

These problems haven’t gone away, and so it seems unlikely Labour is about to change its mind about changing its mind on the lifetime allowance.

We have an annual limit on pension contributions, which is reduced significantly for high earners. If we want to prevent the very wealthy building-up massive tax-free pensions, this is a much fairer approach than the lifetime allowance.⁴Although it’s unfair in many ways. People who earn a high income for a few years do much less well than people with the same overall income spread over more years.

Freeze the additional rate tax threshold – £2bn by 2033

Gordon Brown introduced a 50p additional tax rate in 2009 for people earning £150,000. It was then cut to 45p by George Osborne in 2013.

£150k in 2009 is about £240k in today’s money. But today, the additional rate threshold isn’t £240k – it’s £125k.

And it’s worse than that, because the marginal rate between £100k and £125k is actually higher – 62% – because of the way the personal allowance “tapers” for incomes over £100k. Today, about 3% of income tax payers pay the 45p or 60p rate.

The current plan is to continue to freeze the additional rate taper until 2028, and then uprate it in line with inflation. Ms Rayner’s memo proposes freezing it past that point.

Freezing tax thresholds is not good tax policy. It’s a large tax increase, but a hidden one. It undermines the progressivity of the tax system to have the highest rates paid by more and more people. And it doesn’t affect the seriously rich, just the moderately high earning.

Increasing bank taxation

It’s politically very easy to tax banks.

The problem is that they are already highly taxed. Banks pay normal corporation tax of 25%, plus a bank surcharge of 3%, plus a bank levy of 0.1% of their balance sheets.

This leaves the UK with the highest rate of tax on banks amongst major economics, and Lloyds Bank as probably the greatest single corporate taxpayer in the UK. It’s certainly not the most profitable company in the UK.

There isn’t a principled argument for increasing bank tax any further. The fact banks lobbied against increasing the surcharge doesn’t make them wrong (and JPMorgan is right to say that punishing JPMorgan for the sins of UK banks before the financial crisis is unfair).

What we should be doing is looking at making bank tax more rational. Why is there a surcharge and a bank levy? Why not raise the same amount from one tax? I wrote about this here.

Raise rates on dividend tax

The top rate of income tax on most income is 45%. So on the face of it it’s odd that the top rate of income tax on dividends is 39.35%.

There are two justifications.

The first is that dividends are paid out of company profits that have already been subject to corporation tax at 25%. So the overall effective rate is 54.5%.⁵Start with £100 of corporate profit. Corporation tax is 25% for large companies (less for small companies), leaving £75 to be paid as a dividend. That £75 is taxed at 39.35%, i.e. £29.51. So total tax out of the £100 is £54.51, or about 54.5%.

The second is that we want to encourage people to invest in companies, and too high a rate of dividend tax won’t do that. For this reason, most countries tax dividends significantly less than normal income. The UK is a bit of an outlier in how high our dividend tax is. This chart, prepared before the Budget⁶so the UK CGT rate shown is out-of-date – it’s now 24%, not 20%., compares share CGT and dividend income tax rates across the OECD:

The tail of the red arrow is the UK’s dividend tax rate. It’s one of the highest in the OECD. So the case for increasing it is not persuasive.

• 1
  Unfortunately we lack the data to come up with a proper estimate. There is good data on commercial real estate transaction volumes (about £40bn in 2023) but the HMRC figure for non-residential stamp duty revenue (about £3bn) can’t be directly compared, because the scope of SDLT is much broader than the commercial sales tracked by BNP and others. for example: the £40bn figure is high-value purchases only (£1m+). The HMRC figure includes all purchases, plus lease extensions and other non-purchase transactions. And the £40bn is only actual commercial real estate; the HMRC figure includes agricultural transactions, mixed transactions, and purchases of rental property portfolios (because of the multiple dwelling relief exemption, now abolished). So we can’t calculate the “missing” SDLT by comparing these two figures.
• 2
  Although there would likely be significant tax planning/avoidance in response, reducing the yield.
• 3
  The “ready-reckoner” is really only good for small changes; completely abolishing the dividend allowance will likely not have the same result as five times a 20% reduction in the allowance. For example: we may see a greater taxpayer response (as was seen for previous changes), reducing the yield. The distribution of dividends may be non-linear, i.e. with lots of people receiving just a few £ of dividends each year, increasing the yield. Administrative costs may increase once very small amounts of dividends are taxed, reducing the yield.
• 4
  Although it’s unfair in many ways. People who earn a high income for a few years do much less well than people with the same overall income spread over more years.
• 5
  Start with £100 of corporate profit. Corporation tax is 25% for large companies (less for small companies), leaving £75 to be paid as a dividend. That £75 is taxed at 39.35%, i.e. £29.51. So total tax out of the £100 is £54.51, or about 54.5%.
• 6
  so the UK CGT rate shown is out-of-date – it’s now 24%, not 20%.