Rachel Reeves: What taxes could the Chancellor raise?

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• Author, Faarea Masud
• Function, BBC News

• August 1, 2024

But Chancellor Rachel Reeves has ruled out raising taxes on workers, including VAT (value added tax), income tax and National Insurance.

So which taxes might increase?

1. A “stealth tax”

One option would be to introduce a so-called stealth tax – a means of raising revenue that is not explicitly labeled or intended as a tax.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), believes the most obvious solution would be to focus on tax thresholds — the amount of money you can earn before any tax starts to be paid.

The income tax and National Insurance thresholds are currently frozen until 2028, a policy brought in by the previous government. But Labour could extend them beyond this date.

The policy amounts to a tax increase because of a process called “fiscal drag,” which causes more people to be “dragged” into paying higher tax rates as their wages rise.

Its director, James Smith, told the BBC that this could be enough to address the “deficit” in the public finances, meaning Ms Reeves would not have to raise any further taxes.

2. Increase capital gains tax

Another route Ms Reeves could take is to introduce capital gains tax (CGT).

This is charged on the profit made from the sale of an asset that has increased in value, with some examples including shares that are not held in ISAs or second homes.

CGT is paid by individuals, but also by self-employed individual traders, partners in commercial companies and business owners, among others.

It starts at a rate of 10% (or 18% on residential properties) on profits over £3,000. It then rises to 20% on anything above the basic rate of tax, or 24% on residential properties.

Critics point out that CGT rates are substantially lower than income tax. They say this could benefit wealthier people and that Ms Reeves could choose to level the playing field or cut some CGT tax reliefs for companies.

However, industry groups have warned that the CGT hike could hit those at the heart of Labour’s plans for economic growth.

“No government that is serious about growth would increase capital gains tax (CGT) on entrepreneurs who sell a small business,” Tina McKenzie, from the Federation of Small Businesses (FSB), told the BBC.

“Investing in a small business is already one of the least tax-efficient things anyone can do with their money,” she said, adding that she hoped the party would continue to work “in partnership” with businesses.

3. Reduce tax exemption for pensions

The relief allows part of a person’s earnings that may have been taken by the government in taxes to be put toward retirement savings.

Under the current system, savers receive tax breaks at the same rate as income tax — meaning that basic-rate taxpayers receive a 20% reduction and higher-rate taxpayers receive a 40% or 45% reduction.

In the run-up to major political events like the Budget, Tom Selby, director of public policy at AJ Bell, says there is often speculation that a flat rate of pension tax relief could be introduced.

This would mean the system would be less generous for higher earners, but the IFS suggested it could raise “billions” for the government.

Some opponents said, however, that it could dissuade people from saving for the future and could be difficult to implement.

4. Increase inheritance tax

Inheritance tax, currently paid at a rate of 40%, is levied on the portion of a deceased person’s estate above the £325,000 threshold.

But that only applies to less than one in 20 states.

No tax is payable if the estate is valued at less than £325,000, or if any amount above this threshold is left to a husband or wife, civil partner, charity or a community amateur sports club.

And if a house is part of an estate and a person’s children and grandchildren are to inherit it, the limit could be as high as £500,000.

Ms Reeves could increase the rate of inheritance tax or restrict the relief available on certain inherited assets.

This includes farmland and retirement savings, which can be inherited tax-free.

There are also discounts for unlisted shares, which are shares in a company not listed on the stock exchange.

James Smith of the Resolution Foundation believes inheritance tax should be reformed because there are “all sorts of benefits within the system that allow you to move your assets in a way that allows you to avoid paying inheritance tax”.

However, Mr Johnson says Ms Reeves will have to go further than simply cutting subsidies, saying: “You won’t raise much doing that – maybe a billion or two.”

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