Possible Tax Increases in UK by Rachel Reeves

As discussions around the economy and public finances continue, there is growing speculation about the possible tax changes that could be introduced by Rachel Reeves, the Shadow Chancellor. With the need to address financial shortfalls and the desire to fund public services, several tax options might be on the table. These potential changes could significantly impact individuals and businesses across the UK. Below, we explore four key areas where Reeves could implement tax increases: stealth taxes, capital gains tax, pension tax relief, and inheritance tax.

Stealth Tax: An Under-the-Radar Revenue Boost

One of the possible approaches that Rachel Reeves could consider is the introduction of what is commonly referred to as a "stealth tax." Unlike traditional taxes, a stealth tax is a way of raising revenue without explicitly labeling or presenting it as a tax increase. According to Paul Johnson, the director of the Institute for Fiscal Studies (IFS), one of the most straightforward methods to implement a stealth tax is by focusing on tax thresholds—the levels of income you can earn before tax becomes payable.

Currently, the thresholds for income tax and National Insurance are frozen until 2028, a policy that was put in place by the previous government. By extending this freeze beyond 2028, Labour could effectively increase tax revenue without directly raising tax rates. This strategy works through a process known as "fiscal drag," where as people's wages increase over time, more individuals are pulled into higher tax brackets, resulting in higher tax payments.

The Resolution Foundation, a think tank dedicated to improving living standards for low-to-middle-income families, estimates that the current freeze on thresholds could generate approximately £40 billion in revenue by 2028. James Smith, the director of the Resolution Foundation, suggests that this could be sufficient to address the "shortfall" in public finances, potentially avoiding the need for additional tax increases.

Increasing Capital Gains Tax: A Target on Wealth

Another avenue Rachel Reeves could explore is raising capital gains tax (CGT). CGT is a tax on the profit made from selling an asset that has increased in value, such as stocks or property not held in ISAs or second homes. This tax is currently payable by individuals, self-employed sole traders, business partners, and company owners.

The basic rate of CGT starts at 10% (or 18% for residential property) on profits above £3,000. For amounts above the basic tax rate, CGT rises to 20%, or 24% for residential property. Critics argue that CGT rates are much lower than income tax rates, which can disproportionately benefit wealthier individuals. As a result, Reeves might consider increasing CGT rates or reducing certain tax breaks, aiming to create a more level playing field.

However, industry groups have expressed concerns about this approach. Tina McKenzie from the Federation of Small Businesses (FSB) warns that increasing CGT could negatively impact entrepreneurs, particularly those selling small businesses. McKenzie notes that investing in a small business is already a less tax-efficient option, and raising CGT could discourage investment and growth.

Pension Tax Relief: A Potential Area for Reform

Pension tax relief is another area where Rachel Reeves could make changes to raise revenue. Currently, individuals and employers who contribute to private pension pots receive tax relief on those contributions, up to certain limits. The relief allows a portion of earnings, which would otherwise be taxed, to be directed into retirement savings instead.

Under the existing system, tax relief is provided at the same rate as income tax, meaning basic rate taxpayers receive 20% relief, while higher rate taxpayers receive 40% or 45% relief. Some experts, like Tom Selby, director of public policy at AJ Bell, have speculated that a flat rate of pension tax relief could be introduced, which would reduce the benefits for higher earners. The IFS has suggested that such a change could raise billions for the government.

However, opponents argue that this reform could discourage saving for retirement and might be challenging to implement effectively.

Raising Inheritance Tax: A Controversial Choice

Inheritance tax, currently set at 40%, is charged on the portion of a deceased person's estate that exceeds £325,000. However, it applies to fewer than one in 20 estates. There are several exemptions and reliefs available, such as the ability to leave a home to children or grandchildren, which can increase the threshold to £500,000.

Rachel Reeves could consider raising the inheritance tax rate or reducing some of the reliefs available on inherited assets, including agricultural land and pension savings. Additionally, allowances for unquoted shares in businesses not listed on the stock exchange might be targeted.

James Smith of the Resolution Foundation has suggested that inheritance tax should be reformed due to the various reliefs that enable individuals to avoid paying the tax. However, Paul Johnson of the IFS believes that merely curbing allowances would not generate substantial revenue, estimating it might only raise a billion or two.

Balancing Revenue and Public Sentiment

As Rachel Reeves considers potential tax changes, each option presents its own set of challenges and implications. While these taxes could help address public finance shortfalls, they may also provoke public opposition and impact economic growth. The balance between raising necessary revenue and maintaining public and business support will be a crucial factor in any decisions made.