The tax rises that could come in the Budget – and how likely they are

The Chancellor is weighing up tough choices over whether to slash spending on public services or raise billions of pounds through tax rises in the upcoming Budget on 28 October. The nation’s leading economic think tank – the Institute for Fiscal Studies (IFS) – warned John Healey may have to hike taxes by up to £35bn to cover looming spending pressures related to increasing defence spending and higher inflation triggered by the Iran war. It comes amid warnings that the Chancellor’s fiscal headroom could fall from the forecasted £23.6bn to roughly £14bn following a surge in the cost of government borrowing, triggered by conflict in the Middle East. Shorts If the Government chooses to top up departmental spending without increasing borrowing, it would require huge tax rises by the end of the decade. However, Prime Minister Andy Burnham has promised to stick within the constraints of Labour’s 2024 election manifesto, which ruled out raising core taxes on working people, including income tax, VAT or employee national insurance. Here are some of the other options for the PM and Chancellor, and how likely they are. Windfall tax on banks Speculation has grown that Healey could hit the nation’s biggest banks with a tax rise in his first Budget after he held talks with finance bosses last week. The Chancellor reportedly told the chief executives of banks including Barclays, HSBC, Lloyds, Nationwide and NatWest that the UK is in a tough financial position, but he has not yet decided whether to increase taxes on the industry. Some Labour backbenchers have been pushing for a windfall on banking profits to sit alongside existing taxes on the sector. But bank executives warned the Chancellor a potential windfall tax could affect lending and make the UK less attractive to investors. They argue this would have wider economic consequences. However, the Trade Union Congress – which represents unions across England and Wales – found that tax cuts for big banks have deprived the UK government of £6bn in revenue over the last three years. Hitting banks with a windfall tax has the backing of voters, according to the latest BMG Research survey for The i Paper, which found half the public (50 per cent) support such a move, compared to 13 per cent who are against it. Likelihood: 3 out of 5 Extending the mansion tax Healey has ruled out lowering the threshold for the high value property surcharge – or “mansion tax” – from £2m to £1.5m following warnings it could disproportionately hit middle earners in London. He had been considering widening the council tax surcharge to include less expensive homes to raise extra money for the Treasury. In last year’s Budget, then-Chancellor Rachel Reeves announced that owners of properties in England valued at more than £2m will have to pay a surcharge of at least £2,500 from 2028. Lowering the threshold would increase the number of homes forecast to pay the charge from 134,000 to 271,000 based on current values, with around half of the affected properties in London. The move was criticised by many Labour backbenchers, with one London MP telling this newspaper it would be a “catastrophic electoral own goal”, while even some left-wingers representing seats elsewhere in the country warned it could hit “ordinary families” living in the capital. Another Labour MP said they were pleased changes to property tax are “on the agenda” and suggested there could still be reform in this area. Likelihood: 1 out of 5 Capital gains tax reform Many economists and Labour insiders saw an increase to the capital gains tax (CGT) as the front-runner after Healey told the Sunday Timesthe UK has the “lowest capital gains tax (CGT) of any European G7 nation”. CGT – paid on the profit of the sale of an asset such as a second home or shares – currently sits at 18 per cent for basic-rate income taxpayers and 24 per cent for higher and additional-rate taxpayers. This year, individuals can make £3,000 profit on capital gains before it is taxed. Labour insiders are pushing for CGT rates to align more closely with income tax rates to remove a loophole for those who earn money on properties and shares, compared with those who pay tax on normal earnings. CGT reform has previously been backed by Burnham’s second-in-command, First Secretary of State Louise Haigh, and the Defence Secretary, Wes Streeting – albeit both before their roles in Burnham’s Cabinet were confirmed. However, leading economists have warned it could damage investor confidence in the UK, potentially harming economic growth. The amount it would raise is fiercely contested, with the Institute for Public Policy Research think tank claiming it could generate £14bn a year, but sceptics suggest it could actually end up costing the Treasury money if people delayed asset sales or moved overseas. Likelihood: 3 out of 5 Pensioner tax rises Pensioners and those saving towards their retirement could be in the firing line for some tax increases. One option would be to cut the size of the tax-free lump sum people can take from their pensions, which is either 25 per cent of the amount or £268,275 – whichever is lower. Another idea is to limit pension tax relief. If you pay into a pension, you receive relief at whatever income tax rate you pay, so higher rate payers get more generous tax relief. Former pensions minister Sir Steve Webb has called on the Government to raise income tax for over 40s to help fund his plan to build a national care service. However, this would be from the next general election, due in 2029 at the latest. Policy that directly affects older voters is known to be politically toxic as pensioners are more likely to turn out in the polls. Likelihood: 2 out of 5 Tax relief for pensioners However, people who rely on the state pension as their main source of income are set to be protected from being dragged into the income tax threshold. Because of the triple lock policy, the state pension is set to climb to more than £13,000 a year in April, putting it above the income tax personal allowance of £12,570 for the first time. In his speech to Labour’s annual conference last month, Burnham confirmed his “commitment to ensure low-income pensioners won’t be dragged into paying income tax in this Parliament”. The Treasury is expected to outline details of how this will work in the Budget. Likelihood: 5 out of 5 Inheritance tax Before becoming PM, Burnham suggested charging inheritance tax as a flat 10 per cent levy on all estates to fund social care. The PM has since confirmed his mission to reform social care, but said this would only be from the next general election and that it would be funded via moving away from the triple lock on state pensions. However, there is speculation that smaller tweaks to inheritance tax could be made, such as tightening rules around giving gifts. Currently, you can give away up to £3,000 per year without triggering the levy. Pressure is growing on inheritance tax reform after opposition leader Kemi Badenoch announced a flagship proposal to abolish the levy entirely as soon as public finances permit. Likelihood: 2 out of 5