Which Taxes May The Budget Increase?
The government has declared that in order to close what it describes as a £22 billion “hole” in the public coffers, higher taxes will be necessary.
It is “going to be painful” to present the first budget under Prime Minister Sir Keir Starmer’s new administration on October 30.
However, Labour has said that it will not increase income taxes, national insurance, or value-added tax (VAT) for “working people”.
Which taxes, then, may increase?
1. A “stealth tax”
Introducing a “stealth tax,” or a method of earning money that isn’t formally designated as a tax, is one approach.
The Institute for Fiscal Studies (IFS) director, Paul Johnson, thinks that concentrating on tax thresholds—the amount of money that can be earned before any taxes begin to be paid—would be the most obvious way to find a solution.
As per the strategy implemented by the previous government, the income tax and national insurance thresholds are now set to remain unchanged until 2028. However, Labour may decide to keep them after this date.
The “fiscal drag” effect, which sees more people “dragged” into paying greater rates of tax as their salaries grow, makes the program essentially a tax increase.
The Resolution Foundation, a think tank dedicated to raising the standard of living for low-to-middle-class people, estimates that by 2028, the present freeze will bring in almost £40 billion in revenue.
According to its director, James Smith, Ms. Reeves wouldn’t need to impose any additional taxes because that might be sufficient to cover the “shortfall” in the public coffers, as reported by the BBC.
2. Implement a capital gains tax
Ms. Reeves may also choose to implement capital gains tax (CGT).
This is levied on the gains realized from the sale of an item whose value has increased; stocks that aren’t kept in ISAs or second houses are two examples of assets that qualify.
In addition to individuals, self-employed sole traders, business partnership partners, and company owners are also required to pay capital gains tax (CGT).
It begins at 10% on profits over £3,000 (or 18% on residential property). After that, it increases to 24% on residential property and 20% on any amount beyond the basic tax rate.
The fact that CGT rates are significantly lower than income tax is brought up by critics. Wealthier people may profit from this, it is said, and Ms. Reeves may decide to level the playing field or reduce some of the CGT tax incentives for firms.
Industry associations have cautioned, though, that raising CGT might harm companies that are essential to Labour’s strategies for expanding the economy.
According to Tina McKenzie of the Federation of Small Businesses (FSB), “no government at all serious about growth would hike CGT on entrepreneurs selling a small business.” McKenzie spoke to the BBC.
She stated, “One of the least tax-efficient things anyone can do with their money is already investing in a small business,” and expressed her hope that the party would keep working “in partnership” with industry.
3. Fuel tax
The amount of fuel duty, a tax imposed on the purchase of gasoline, diesel, and other fuels, ought to affect the price that drivers pay at the gas pump.
The Office for Budget Responsibility describes the levy as a “significant source” of funding for the government, with £24.7 billion anticipated to be raised in 2023–2024.
However, it has been over ten years since fuel duties were increased. In 2022, it remained fixed at that same amount.
Then, in March 2022, following Russia’s invasion of Ukraine and record pump prices, the then-Tory chancellor Rishi Sunak lowered it by 5 p.m. per litre.
Nonetheless, a few automotive associations contend that drivers have not benefited from this discount, which is scheduled to expire in March of next year.
Because of this, the RAC has recommended that Ms. Reeves remove the cut from the budget.
The RAC’s head of policy, Simon Williams, stated that the driving organization has concluded that the chancellor “has no option but to put fuel duty back up”.
The speaker stated that Ms. Reeves “knows the 5p discount is losing the Treasury £2bn a year.”
4. Cut back on pension tax benefit
Up to certain limits, individuals and their employers who contribute to private pension pots are eligible for tax reduction on these contributions.
A portion of an individual’s wages that could have been withheld by the government for taxes can now be saved for retirement thanks to the relief.
The current system provides tax relief to savers at the same rate as income tax; that is, basic rate taxpayers receive a 20% tax relief, while higher rate taxpayers receive a 40% or 45% tax relief.
Tom Selby, head of public policy at AJ Bell, notes that there is a lot of conjecture about the possibility of introducing a flat rate of pension tax relief in the run-up to major political events like the Budget.
Although the IFS has indicated that doing so may generate “billions” for the government, this would imply that the system is less generous for higher earners.
However, some opponents have claimed that this may be challenging to execute and discourage individuals from saving for the future.
5. Increase the inheritance tax
Over £325,000 in value, inheritance tax is levied on the portion of a deceased person’s estate that is subject to the 40% rate at present.
However, it only pertains to less than 20% of estates.
If the estate is valued less than £325,000 or if any portion of it is bequeathed to a spouse, civil partner, charity, or local amateur sports club, no tax is due.
Furthermore, the barrier may increase to £500,000 if a person’s property is included in their inheritance and their children and grandchildren are eligible to receive it.
Ms. Reeves has the option to reduce the relief offered on specific inherited assets or increase the inheritance tax rate.
These consist of pension funds and agricultural land, both of which are transferable tax-free.
Unquoted shares, or shares in a company not listed on a stock exchange, are also eligible for allowances.
Because there are “all sorts of reliefs within the system that allow you to move your assets in a way that allows you to avoid paying inheritance tax,” James Smith of the Resolution Foundation thinks inheritance tax should be overhauled.
Ms. Reeves will need to take action beyond just reducing allowances, according to Paul Johnson of the IFS, who claims, “You won’t raise a lot by doing that—maybe a billion or two.”
The Resolution Foundation claims that because inheritance tax is so unpopular, calls to reduce or eliminate it are frequent.
