Which taxes will be raised in the Budget?
The UK Chancellor has now received the first forecast from the OBR. There will be two more
“pre-measures” rounds before the crunch moment on 10 November when the OBR deliver
to the Treasury the first “post-measure” forecast. That’s the point where Reeves will have
had to make some decisions on what might actually end up in the Budget and the OBR will
hit F9 on the spreadsheet to see if it does indeed fill the fiscal black hole. If not, there is one
more forecast round to make the numbers add up before Budget Day on 26 November.
To give a flavour of what might be required, the Institute for Fiscal Studies has just released a
report on “Options For Tax Increases” which puts some economic meat on the Excel bones.
As you might imagine, the big numbers come from raising the rate of the main taxes. These
are the ones that the government made a manifesto pledge not to raise: income tax,
national insurance and VAT. After that it’s property taxes which includes Kemi Badenoch’s
beloved stamp duty along with everyone’s bin-collecting favourite, council tax. Next comes
corporation tax, which the government pledged to keep stable and predictable in last year’s
“Corporate Tax Roadmap”. You can see that if all of these are to remain untouched, there
are thin pickings indeed for the Chancellor to rely upon for raising the necessary revenues.
But that doesn’t mean she won’t try. The IFS work through an example of several measures
that could cumulatively raise £20bn:
- a new surcharge to double the top two bands of council tax
- abolish the nil-rate band within inheritance tax
- increase the surcharge on banks
- stop forgiveness of capital gains on death
- abolish business asset disposal relief
- and manage to squeeze £5bn out of the tax gap between what small businesses
should be paying in tax but actually have paid.
The IFS isn’t recommending this package, simply using it as an illustration. The £20bn
raised from the shopping list above could also be achieved by raising the basic rate of
income tax from 20 per cent to 22 per cent. That might be electorally suicidal but you’ve got to raise the big taxes to be sure you’ll actually get the money in. This is why Reeves ended up going for national insurance contributions last time around: it’s tough for so many taxpayers to wriggle
out of it.
It is also why wealth taxes are tricky. Hitting a handful of globally mobile multi-millionaires
with hard-to-value assets is harder than an extra penny on 29.5 million basic rate taxpayers.
Perhaps then you might think there is a middle ground – what about increasing income tax
only on those who pay the two higher rate bands? But where going from 20 per cent to 21 per cent for basic rate yields £8.5bn, doing the same for the 40 per cent and 45 per cent tax bands only brings in an extra £2.4bn. There are just far fewer higher and additional rate taxpayers.
VAT is a tax that hits everyone and so raising it from 20 per cent to 21 per cent would bring in almost £10bn according to the IFS. However it would also raise inflation, not particularly useful if
you’d like the Bank of England to continue cutting interest rates. The IFS points out that the
UK has an unusual amount of zero-rated and exempt products from VAT compared to its
peers. If the Chancellor put only one per cent on zero-rated products it would raise a chunky £4.2bn. Cue squeals from those who claim food and children’s clothes really must stay outside the clutches of VAT. But should billionaires in the Mayfair boutique baby shops benefit when they
load up on designer clothes? Broadening the VAT base would also reduce the time and
money spent on arguments such as whether a Jaffa Cake is a cake or a biscuit (in 1991 a
court famously ruled it was indeed a cake and thus, as food, zero-rated).
It may be less contentious for the Chancellor to poke around in pensions. Many have done
so before her. The IFS calculates that capping income tax relief on pensions at 20 per cent would
raise the not insignificant sum of £22bn. But they caution that this isn’t an easy win. It could
create a disincentive for higher-rate taxpayers to save and would be “a particular shock to
those who are currently basic-rate taxpayers but whose pension contributions would, if
taxable, make them a higher-rate taxpayer – a group that includes many teachers and
nurses, for example”. The IFS suggests that lowering the tax-free element of pension income
or levying NICs on employer pension contributions would be better options.
All of these tortuous attempts to make the numbers add up for the OBR are missing the
bigger point.
As one of the authors of the IFS report concluded, “The last thing we need in
November is directionless tinkering and half-baked fixes”. They call instead for brave tax
reform. That will be a step too far for a party plummeting in the polls and consumed by
internecine warfare. Rachel will bury her head in the spreadsheet and hope for the best.
Helen Thomas is founder of Blonde Money