Which taxes could Rachel Reeves raise in the Autumn Budget
Rising borrowing costs, u-turns on spending cuts and a wafer-thin fiscal headroom all point to one thing: Chancellor Rachel Reeves is widely expected to put up taxes later in the year.
But given Labour’s manifesto commitment to avoid tax rises on “working people”, and the pain felt by businesses over National Insurance hikes, many are scratching their heads over which moves Reeves will make.
“It’s a difficult picture in terms of finding which taxes are left given the options within the self imposed commitments that the government set out in its manifesto,” said Bee Boileau, research economist at the Institute for Fiscal Studies.
“They’ve ruled out changes to these bigger taxes where it would be easy to make smaller changes that would then cover quite a bit of the headroom – and have left themselves with making much more difficult tweaks to smaller and more distortionary taxes.”
Dr Ben Caswell, senior economist at the National Institute of Economic and Social Research, said it was highly likely that Reeves would extend a planned freeze on income tax bands to the end of the parliament – a move which would bring in billions as earnings rise.
The freeze, which is already planned to last until 2028, is projected to drag around two million workers into higher tax bands.
“It seems like that will actually generate quite a bit of revenue towards the end of the parliament so I’m almost certain that she will do that,” Caswell said.
“It’s a meaty tax but it’s a stealth income tax – because it’s done through indirect means rather than direct legislation, people view it differently.”
Income tax bands likely to be frozen
Another policy high up the agenda is to cut the current cash ISA limit from £20,000 to as low as £4,000, a move designed to push savers into investing in more productive assets like stocks. In the 2022/23 tax year, 7.9m Britons contributed a combined £42bn to cash ISAs with an average subscription of £5,296.
Taken with the income tax bands freeze, “These things together would cobble a little bit of money,” Caswell said. “[But] whether it’s enough to put her in an established position where she’s restored a lot of headroom, I’m not sure.”
We are already aware of other proposals under consideration by at least some people round the cabinet table, thanks to a recently-leaked memo sent to Reeves by deputy PM Angela Rayner, who called for changes to dividends taxes and the reinstatement of the pensions lifetimes allowance.
But those changes, uncomfortable as they may make businesses, are unlikely to move the dial, Caswell said.
“Those taxes by definition count for a very small share of the government’s tax revenue, so if you were to tweak them on the margin it’s coming out in the wash a lot of times – you wouldn’t see it in the big numbers, it’s almost a rounding error,” he said.
“Ruling out tax rises on working people, when you know they are doing the heavy lifting, is not a long-term credible strategy given the state of the public finances…but the tax burden is already very high.”