Making changes to inheritance tax, capital gains tax and employer national insurance in the upcoming autumn budget could help chancellor Rachel Reeves raise more than £20bn, according to new research by think tank Resolution Foundation.
The government has said it is facing a £22bn “black hole” in public finances, with Reeves hinting that tax rise would be needed to plug this gap. Prime minister Keir Starmer has cited the £22bn figure in the decision to cut winter fuel payments, which has been met with criticism.
Adam Corlett, principal economist at the Resolution Foundation, said that there is widespread speculation as to what Reeves will announce in her first budget as chancellor on Wednesday 30 October, but pointed out that “tax rises are a dead cert and a time-honoured tradition”.
Some £10bn of tax rises were included in the Labour manifesto, but Corlett said that “fresh ones will be needed in order for Rachel Reeves to sufficiently fund public services and investment while still hitting her fiscal rules.”
However, the government has pledged not to raise the main rates of income tax, corporation tax, VAT or national insurance.
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Resolution Foundation said capital gains tax was “ripe for reform…as rates are unjustifiably lower compared to those on other forms of income.” While employment income faced a 53% top rate of tax on earnings, some capital gains have a top tax rate of just 20%.
Aligning capital gains tax rates with dividend tax rates, taxing property capital gains like wages, introducing capital gains tax exit charges when moving country, and applying it at death could raise up to £12bn, according to the Resolution Foundation. It said that dividend and rental income tax rates should also be reformed.
The think tank added that these changes should be balanced by reintroducing inflation-indexing to create a tax-free rate of return which would particularly benefit long-term investments.
It also proposed levying employer national insurance (NI) on the contributions employers make towards their employees’ national insurance.
“Doing this at the same time as abolishing NI on employees’ pension contributions would leave a typical worker saving via auto-enrolment better off, while still raising £9bn overall,” Resolution Foundation said.
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On inheritance tax, the Resolution Foundation said Reeves should “close loopholes…that allow the very wealthy to avoid paying their fair share, and undermine public trust in the tax.”
Ending business and agricultural reliefs and bringing pension pots into the scope of inheritance tax would raise £2bn, the research found.
Taxes are already set to go up because of the £24bn in rises previously announced by Reeve’s predecessor Jeremy Hunt. Reeves has not indicated that these planned changes would be reversed.
This includes a scheduled increase in fuel duty, a tax included on the price of petrol, diesel and other fuels, which is on track to exceed 6p per litre in 2025.
Resolution Foundation urged the Treasury to cancel the “damaging” planned rise in stamp duty, which is a tax levied on property purchases and is due to increase next April, which the think tank said would hit mobility.
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The think tank highlighted that since the 1990s, taxes have gone up by an average of £21bn over the first two fiscal events after an election.
Sarah Coles, head of personal finance at Hargreaves Lansdown said the government should beware the unintended consequences of tax rises.
Increasing capital gains on stocks and shares could put people off investing, while raising this tax on property could persuade more landlords to sell up, “cutting the number of decent private rental properties available,” she said.
“History is littered with tax tweaks that had significant unintended consequences, that no government can afford to overlook,” she added.
“Changing tax rules will often persuade people to change their behaviour in a way that the chancellor didn’t foresee. There are a number of memorable instances of this, perpetrated by chancellors of every party.”
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