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The Guardian - UK
The Guardian - UK
Business
Larry Elliott Economics editor

Reeves urged to make tax changes ‘to raise more than £20bn a year’

The chancellor, Rachel Reeves
Rachel Reeves has warned of ‘tough decisions’ in the budget in October because of the state of the public finances. Photograph: Getty Images

Rachel Reeves is being urged by a left-of-centre thinktank to announce changes to capital gains tax, inheritance tax and national insurance in next month’s budget that would raise more than £20bn a year for the Treasury.

With the chancellor looking for ways to plug a £22bn hole that she has identified in the public finances, the Resolution Foundation said it was a time-honoured tradition that taxes were raised in the first budget after an election.

The thinktank said its proposals would raise large sums of money while still meeting a “triple tax test” of making the system more efficient, ensuring the tax rises hit the better off, and not breaking Labour’s 2024 manifesto commitments.

Reeves and the prime minister, Keir Starmer, have warned voters that the state of the public finances means “tough decisions” will be necessary in the budget, and changes to capital gains tax (CGT) and inheritance tax (IHT) are high on the list of revenue-raising measures being considered by the Treasury.

Adam Corlett, a principal economist at the Resolution Foundation, said: “There is widespread speculation about what might be in the first budget of the new parliament, but overall tax rises are a dead cert and time-honoured tradition. The Labour manifesto included £10bn of tax rises, but fresh ones will be needed in order for Rachel Reeves to sufficiently fund public services and investment while still hitting her fiscal rules.”

The thinktank said taxes were going up even in the unlikely event that Reeves chose to announce no fresh revenue-raising measures on 30 October, because she had inherited £24bn of tax increases bequeathed from her predecessor Jeremy Hunt – and given no hints that they would be reversed.

These include a scheduled rise in fuel duty – on track to exceed 6p a litre in 2025 - that the foundation said should remain in place. But it called on Reeves to scrap the “damaging” rise in stamp duty – due to come into force next April – at a cost of £1.8bn.

In addition to immediate reforms of CGT, IHT and national insurance (NI), the thinktank said Reeves should “get the ball rolling” on important longer-term tax reforms to business rates, council tax and road pricing.

Corlett said: “The chancellor’s self-imposed constraints on not raising income tax, VAT, national insurance or corporation tax don’t leave her much room for manoeuvre if she doesn’t want to break manifesto commitments. But there are still several areas of tax she should focus on.

“Long overdue reforms to IHT, CGT and pension contribution reliefs would fit the bill and could raise over £20bn if needed, while also making the tax system fairer and more consistent between different taxpayers.”

The thinktank said up to £12bn a year could be raised from a CGT regime that was “ripe for reform” because rates of the tax were “unjustifiably” lower than for other forms of income.

It proposed aligning CGT rates for shares with dividend tax rates, taxing property capital gains like wages, introducing CGT exit charges when moving country, and applying it at death. Dividend and rental income tax rates should also be reformed.

To soften the blow, changes should be balanced with the reintroduction of inflation-indexing so as to create a tax-free rate of return designed to encourage long-term investments.

The foundation said Reeves could raise a further £9bn by levying employer NI on employers’ pension contributions. Simultaneously abolishing NI on employees’ pension contributions would leave a typical worker saving via auto-enrolment better off, it said.

The chancellor should also close loopholes in IHT that “allow the very wealthy to avoid paying their fair share, and undermine public trust in the tax”, the thinktank said. Ending business and agricultural reliefs and bringing pension pots into IHT would raise £2bn a year.

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