Inheritance tax, capital gains tax and employer National Insurance reforms would raise more than £20billion per year, while still passing a “triple tax test” of improving tax efficiency, a left-of-centre thinktank has said.
Some £10billion of tax rises in the Labour manifesto are likely to be confirmed in the upcoming Budget, the Resolution Foundation said, but warned additional tax rises “will be needed”.
In its Revenue and reform report, the think tank suggested the changes after Chancellor Rachel Reeves “greatly limited revenue-raising options” by pledging not to raise the main rates of income tax, corporation tax, VAT or National Insurance.
Adam Corlett, Principal Economist at the Resolution Foundation, said “overall tax rises are a dead cert and time-honoured tradition” in the Budget, and warned: “Fresh tax rises will be needed in order for Rachel Reeves to sufficiently fund public services and investment while still hitting her fiscal rules.”
The economist said Reeces doesn’t have “much room for manoeuvre” if she wanted to avoid breaking manifesto commitments, but suggested there are “still several areas of tax she should focus on”.
“Long overdue reforms to inheritance tax, capital gains tax and pension contribution reliefs would fit the bill and could raise over £20billion if needed, while also making the tax system fairer and more consistent between different taxpayers,” Corlett said.
Capital gains tax
Capital gains tax is “ripe for reform”, the report found, citing rates as “unjustifiably lower” compared to those on other forms of income.
For instance, the top rate of tax on employment income is 53 per cent on earnings, while some capital gains face a top tax rate of 20 per cent.
The Resolution Foundation has suggested aligning capital gains tax rates for shares with dividend tax rates, taxing property capital gains in the same way as wages, introducing capital gains exit charges when moving country, and applying the tax at death.
The report also proposed changing dividend and rental income tax rates, but suggested these reforms should be balanced with the “reintroduction of inflation-indexing”. This would create a tax-free rate or return which would particularly benefit long-term investments.
This package could raise up to £12billion, the think tank said.
Pensions
The taxation of pensions should also be changed, according to the Foundation, which suggested the Chancellor’s “best option” would be to levy employer National Insurance on employers’ pension contributions, while abolishing National Insurance on employees’ pension contributions.
Branding the current system as “inconsistent and unfair”, the think tank said the measures would leave a typical worker saving via auto-enrolment better off, but would still raise £9billion overall.
Inheritance tax
The Chancellor was also urged to close inheritance tax loopholes – namely ending Business and Agricultural reliefs and bringing pension pots into the inheritance tax scope, to raise £2billion.
It also suggested the Government could end the “complicated” residence nil-rate band while adding lower inheritance tax rate bands.
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Longer-term considerations
Furthermore, the Foundation called for the Government to consider longer-term tax reforms to Business Rates, council tax and road pricing.
The report highlighted “the need” to move to a system where all vehicles pay for road usage, as rising electric vehicle (EV) take-up is set to drive a £17billion hole in public finances by 2033-34.
The report suggested cancelling planned Fuel Duty rises – which are set to exceed 6p per litre in 2025 – shouldn’t be a priority.
On the flipside, the Foundation said the scheduled rise in stamp duty in 2025 should be cancelled to support residential mobility – a measure which would cost £1.8billion.