Rachel Reeves has been warned by top economists that she faces an “impossible trilemma” ahead of the autumn budget and must raise taxes or tear up her flagship borrowing rules to fill a £41bn black hole left by Labour U-turns, higher borrowing and sluggish economic growth.
The National Institute of Economic and Social Research (NIESR) – a leading economic think tank – said the chancellor could also look at spending cuts as a way to raise the money needed by 2029-30 to remedy a £41.2bn shortfall on her “stability rule”.
But ministers have already squeezed significant savings out of their departments in cuts that were unveiled at last month’s spending review, meaning there is now a mounting expectation that the chancellor will be forced to raise taxes instead.
In the wake of the warnings, there are growing questions over how the government will raise the money to fill the gap in the public finances, given Labour’s manifesto pledge not to raise taxes on “working people” leaves the chancellor with a limited number of workable options.
Here, The Independent takes a look at a number of tax rises that the government could rely on to raise funds and balance the books.
Tax threshold freezes
The Treasury’s most likely move would be to extend the freeze on income tax thresholds. This means that as wages rise with inflation, over the years workers are dragged into higher tax bands and end up paying more.
A freeze on the threshold at which the higher 45 per cent tax rate is paid was one of the options suggested by Ms Rayner in her leaked memo. But there is growing speculation the government could extend the freeze across all tax brackets.
Sir Keir has left the door open for such a move, refusing to rule it out when pressed on it at PMQs last month. While he gave an unequivocal answer ruling out increasing VAT, income tax or national insurance, he refused to do so when it came to tax threshold freezes.
It’s a stealth tax, the impacts of which are not felt immediately, meaning it is normally better received among the general public compared with a direct hit to businesses or pay slips. But, if the freeze were extended to the end of the parliament, it could also bring in billions for the Treasury as earnings rise.
The freeze, which is already planned to last until 2028, is expected to drag around two million workers into higher tax bands.
Wealth tax
There have been calls from Labour MPs on the left of the party to introduce a wealth tax, calls which have only grown in the wake of the government’s £5bn welfare U-turn. Rachael Maskell, the architect of the rebellion which forced the government into shelving key pillars of the bill, demanded the government increase taxes on the very richest to pay for the climbdown.
Piling even more pressure on the Treasury last month, former Labour shadow chancellor Anneliese Dodds also urged the Treasury should consider such a tax.
Polling conducted by YouGov on behalf of Oxfam on the eve of the spring statement found more than three-quarters of people (77 per cent) would rather the government increase taxes on the very richest to improve public finances than see cuts to public spending. However, a wealth tax – which could look like a 2 per cent tax on net assets worth more than £10m – is thought to be very hard to implement, and could also lead to some of Britain’s highest earners leaving the country.
Meanwhile, Sir Keir Starmer’s Blairite policy chief, Liz Lloyd, has reportedly warned the PM against implementing such a tax, amid fears about an exodus of high net worth individuals from Britain. The PM is therefore expected to block the mounting calls.
While Downing Street sources have suggested a wealth tax is not on the table, there has been mixed messaging from ministers.
Capital gains
Campaigners on the left have long called for capital gains to be equalised with income tax, believing that workers should not pay a higher levy than those earning money through the appreciation in value of assets.
The tax, paid on the increase in value of an asset such as a house when it is sold, is charged at 24 per cent on most things, while income tax can be as high as 45 per cent.
“Those people go out to work every day to keep our public service going, work in our factories, drive our economy. Where is the equity there?” Labour MP Andy McDonald said on Times Radio.
Ms Rayner also called for the lifetime pensions allowance to be reinstated. The allowance, which puts a cap on how much savers can put into their pension pot before a higher rate of tax is applied, was axed by the Tories. Labour had initially planned to reinstate the cap, but the plans were abandoned ahead of the election.
However, amid the controversy over cutting winter fuel payments – and then later reversing the decision – the government may be hesitant to introduce any other policies which would upset pensioners.
Corporation tax
The chancellor could also look at increasing corporation tax for banks – one of the suggestions included in the deputy prime minister’s memo.
Politically, its fairly easy to tax banks as there is limited direct impact on voters. But it’s important to note that banks in the UK are already highly taxed. They pay normal corporation tax of 25 per cent, plus a bank surcharge of 3 per cent. On top of this, they pay a bank levy of 0.1 per cent of their balance sheets.
The deputy prime minister also proposed raising tax rates on dividends – a portion of a company’s earnings received by a shareholder – for higher earners.
Currently, tax is not paid on dividend income that falls within your income tax Personal Allowance. There is also a £500 dividend allowance each year, meaning individuals only pay tax on any dividend income above this. Removing it altogether would be worth £325 million a year, HMRC data indicates.
However, there are concerns that raising dividend tax rates could discourage people from investing in companies – which is likely to have a net negative impact on the economy.
Ms Rayner also suggested ending inheritance tax relief on shares listed on the smaller Aim stock market. The Aim stock market is a sub-market of the London Stock Exchange. From April 2026, qualifying Aim shares held at the time of death will be eligible for 50 per cent relief from inheritance tax – but Ms Rayner has suggested ending this entirely.
While these changes might make businesses uncomfortable, they’re actually unlikely to raise much money for the Treasury – meaning it’s a less likely option for the chancellor.
