Rachel Reeves have a choice of seven taxes she could increase to pay for the Government’s benefits u-turn. The most likely option is a stealth increase in income tax, but there are others. Experts warn that Prime Minister Sir Keir Starmer’s decision to water down cuts to disability benefits makes tax rises more likely. The Government has said it will reveal details of how the measure will be funded in the autumn Budget, which Ms Reeves is expected to deliver around October.
The initial benefit reforms would have saved the government £5.5 billion by 2029–30. The revised package of reforms will save only £2.5 billion, so will cost the government £3.0 billion relative to its previous plans. The biggest change is that tough new rules limiting entitlement to Personal Independent Payments, a benefit for people with disabilities or long-term health conditions, will now only apply to new claimants. This is set to affect 370,000 current claimants in 2029–30, benefiting them to the tune of around £4,150 per year on average.
Think tank the Institute for Fiscal Studies warned today: “These changes make further tax rises in the Autumn Budget, which will mainly be dependent on how economic forecasts change, even more likely.”
So what taxes could the Chancellor increase?
Income tax
It’s unlikely Ms Reeves will simply increase the income tax rate.
But she is said to be planning to use a trick which effectively does the same thing. This is to freeze the threshold at which people start to pay income tax.
Because of inflation, freezing this threshold really means cutting it. And when you do that, people pay more income tax.
In other words it’s a stealthy way of increasing income tax.
The threshold is currently frozen until 2028. But Ms Reeves is thought to be planning to extend the freeze further.
In fairness to her, the last Conservative government used the same trick and began the threshold freeze.
Capital gains tax
Ms Reeves could also choose to hike up capital gains tax. This would affect people who bought a buy-to-let property and sell it at a profit, or people who make a profit when they sell shares.
The rates for stocks and shares gains is currently 18% for basic rate taxpayers and 24% for those on the higher rate.
It might seem like a safe option for the Chancellor, as it’s seen as a tax that only affects wealthier people. But some people on fairly modest salaries choose to put their money into a buy-to-let property rather than a pension, or put spare money into a fund rather than a savings account, and they could be affected.
Inheritance tax
The Chancellor has already increased inheritance tax and could do so again.
Changes introduced by Chancellor Rachel Reeves will contribute to almost doubling the proportion paying death duties up from 5.2% of estates in the 2023-24 financial year to 9.5% in 2029-30.
An additional £2.5 billion will be handed to the Treasury by bereaved families by 2029-30, according to Treasury watchdog the Office for Budget Responsibility.
It means the Treasury is expected to receive £13.9 billion from inheritance tax in 2029-30
There’s one problem – polling shows it’s the most hated of all the taxes. People think it’s unfair.
Pensions
Many working people save regularly into a pension. Some may not even know they are doing it, as the money is taken automatically out of their salary every month.
It means there is billions of pounds stored in pension pots.
It’s a very tax-efficient way to save, because while there are certain limits, you generally don’t pay tax on income that is saved into a pension.
This means the Treasury gets less income tax, but it saves the Government money in the long run because it encourages people to save so they are not totally reliant on the state when they retire.
The Chancellor could take steps to tax pensions more, such as limiting the tax relief on pension savings or preventing firms using a scheme called “salary sacrifice”.
Property
New tax increases on buying property could be introduced.
Last year, the Chancellor introduced a 2% increase to stamp duty for second home owners. She could increase this.
It’s an easy win for the Government because it’s seen as a tax that only affects wealthy people.
However, while private landlords aren’t popular with everyone, driving them out of the market could just make it harder for people to find a home to rent.
Business taxes
Firms are already paying higher National Insurance thanks to the Chancellor. But she could increase other taxes such as corporation tax or VAT paid by firms.
Businesses would hate this. Shevaun Haviland, Director General of the British Chambers of Commerce, said this week that tax rises were “paralysing growth” and forcing employers to cut investment – with one in three making staff redundant or considering it.
Wealth tax
Left-wing MPs would welcome a wealth tax, imposed on people with assets such as property or shares.
It could mean simply taking 1% or 2% of their wealth every year.
The downside is that some would just leave the country – so they paid no tax at all, including taxes they are paying already.