Rachel Reeves is doing little to play down speculation that the UK government will be forced into fresh tax rises in its Autumn Budget.
The fatalistic mood contrasts sharply with the chancellor’s message after her £40bn tax-raising October Budget last year, which she pitched as a one-off effort to place the public finances on a more sustainable footing.
Analysts estimate the fiscal hole could hit £20bn-£30bn by the autumn, assuming Reeves decides to stick to her self-imposed fiscal rules. Ministers’ struggles to bear down on spending suggest higher taxes will have to fill it.
Personal taxes
Reeves’ choices are heavily constrained by Labour manifesto promises that ruled out hitting “working people” with increases to three of the biggest revenue-raising levies: income tax, VAT and national insurance.
While the pledge takes two-thirds of the tax base off the table, one stealthy way of lifting receipts from the wider population would be to prolong an existing freeze in the thresholds at which income tax and national insurance kick in or increase.
“The only obvious piece of low-hanging fruit is to extend the tax threshold freeze,” said James Smith, an economist at ING bank.
Enacted by the previous Conservative government, the so-called fiscal drag is due to end in April 2028. Forecasts by the Office for Budget Responsibility suggest the existing policy will raise £48.9bn, or 1.4 per cent of GDP, by 2029-30.
The policy is set to bring 4.2mn extra taxpayers into income tax — and shift 3.5mn taxpayers into the higher rate band — by 2028-29. Another 600,000 will move into the 45p additional rate band.
In October, Reeves ruled out continuing the freeze beyond April 2028, saying it would “hurt working people”. But an extension would raise £9bn-10bn a year by the end of the parliament, according to the Institute for Fiscal Studies think-tank.
Taxes on the wealthy
Reeves’ first Budget introduced a large package of tax rises aimed at extracting more revenue from asset-rich individuals, including changes to capital gains tax, inheritance tax and reforms to the non-domicile regime.
Estimated to raise £5.2bn by 2029-30, these were focused on a small number of wealthy taxpayers. Most of the £2.5bn boost to revenues from CGT, for example, was set to come from fewer than 6,000 taxpayers, who make gains larger than £2mn a year, according to the OBR.
As she seeks to balance the books, Reeves could launch a renewed bid to take more revenue from the wealthiest citizens.
Arun Advani, associate professor of economics at Warwick university, suggested that extending national insurance contributions to landlords, shareholders and other investment income could raise £10bn a year.
An annual 1 per cent wealth tax imposed on assets worth over £10mn could raise close to £12bn, he estimated. Former Labour leader Neil Kinnock has called for a 2 per cent rate.
But the OBR warned on Tuesday that increased Treasury reliance on a “small and mobile group of taxpayers” was a risk to the public finances. “Higher earners’ behavioural responses to tax changes are more uncertain and potentially higher than assumed in costings,” it said.
Pension reforms
Pensions are potentially a juicy target for a chancellor heavily constricted by her party’s manifesto pledges, but they are also highly politically sensitive.
One option is reimposing a lifetime limit on private pension pots or targeting the pension tax-free lump sum.
The latter allows individuals to withdraw 25 per cent of their accumulated pension pots up to £268,000 as a tax-free lump sum; restricting that to £100,000 could raise roughly £2bn a year, said the IFS.
Another frequently mooted reform would cut the upfront tax relief on pension contributions available for higher rate taxpayers. Limiting it to the basic rate of income tax would be equivalent to an annual tax rise of £15bn.
But incoming IFS director Helen Miller said it would be better to reform the tax treatment of pension income, rather than tinkering with upfront reliefs, which could disincentivise savings.
Hefty savings would be generated by removing the pensions “triple lock”, which guarantees the state pension rises each year in line with inflation, wage rises or 2.5 per cent — whichever is highest. But after a backlash over planned winter fuel payment cuts, ministers will be wary.
Business taxes
Business lobbyists are on high alert for fresh taxes given the rising strains on the public purse.
Labour pledged last year not to increase corporation tax from the current 25 per cent rate — a vow that the Treasury reiterated in October would be kept for the duration of the current parliament. But an increase of just 1p would raise £4bn a year by 2028-29.
Revenue could be raised in a more targeted way if the Treasury sought to boost revenues from lenders.
At present, the Treasury imposes a levy and a surcharge on banks, both created after the 2008-09 global financial crisis. Together they are on track to raise more than £2.5bn a year by the end of the parliament, and some Labour backbenchers argue they should be boosted.
Reeves could also raise employers’ national insurance contributions again. But October’s £25bn increase provoked an outcry and has begun sapping momentum in the jobs market, according to the Bank of England.
“We think the government will be reticent to hammer businesses again,” said Rob Wood, economist at consultancy Pantheon Macroeconomics.
Other measures
Reeves could turn to an array of other revenue-raising options, which carry varying degrees of political risk.
Reforms to council tax, which is based on heavily outdated home valuations, could be revenue-neutral or raise money, depending on the design of the overhaul.
Increasing rates by 50 per cent on the highest-value properties risks a ferocious backlash among some homeowners. Yet it would bring in close to £3.5bn, according to the IFS, although receipts would flow to local councils rather than government.
Analysts said Reeves could introduce a new levy targeted at raising revenue for health or defence spending. The Conservatives in 2021 proposed a “health and social care levy” based on NICs, but later ditched the idea.
Such a levy would be an income tax increase in all but name, however, leaving ministers open to the charge of contravening their manifesto pledge.
“If a lot of money needs to be raised, it’s hard to see how the chancellor does this without breaking her tax pledges — although there will undoubtedly be some political spin that tries to convince everyone she hasn’t,” said Paul Dales, economist at research company Capital Economics.
