Which taxes could rise at next Budget?

Rachel Reeves appeared to pave the way for significant tax increases in a major pre-Budget speech, as she said “easy answers” were off the table.

It is the starkest warning yet from the chancellor, who has been signalling over the past few months that hard choices will have to be made.

Many economists predict that substantial tax rises can be expected at the crunch fiscal event, as Ms Reeves looks to counteract the country’s ailing economic performance.

Researchers from the Institute for Fiscal Studies (IFS) have found that the chancellor will need to find at least £22bn to make up a shortfall in the government’s finances, as rising borrowing costs and weak growth forecasts drastically reduce her room for manoeuvre.

Speaking from Downing Street on Tuesday morning, Ms Reeves said: “Politicians of recent years have become addicted to shelling out for short-term sticking plaster solutions rather than making long-term economic plans.”

Adding further fuel to speculation is the seeming reluctance from No 10 to re-commit to Labour’s manifesto pledges not to raise the headline rates of income tax, VAT, or national insurance contributions.

As the three largest revenue sources of tax revenue, economists have pointed out that this decision has limited the chancellor’s options. Her recent remarks may hint at an intention to at least partially row back on the commitment, in light of difficult economic circumstances.

Here are some of the other options the chancellor may be considering ahead of the Budget on 26 November:

The passive language on Labour’s tax commitment has led to some speculation that the chancellor may be looking at some type of increase to VAT.

It is unlikely that the chancellor will raise the headline rate of VAT, which is currently charged at 20 per cent on most products and services. The levy is generally passed on to customers, and given recent warnings over living standards and inflation, it would mean more difficulty for already struggling households.

A different route the chancellor could take – arguably still in line with Labour’s commitments – would be to make the rate of VAT uniform.

Food is one of the more complicated areas for the tax, with products like confectionery, hot food and ice cream attracting standard VAT, while meat, vegetables and juice do not.

This was a measure recently backed by the Institute for Government (IfG), which pointed to an ongoing case where a tribunal found that giant marshmallows should not be liable for standard VAT because, as they are unlikely to “normally be eaten with the fingers”, they should not be considered confectionery.

Ambitious plans are reportedly under consideration to replace both stamp duty and council tax with two new “land taxes” that could arguably be more fair.

Replacing stamp duty would be the “national” land tax – a new levy on the sale of a property when it is worth above £500,000. This levy would be proportionate to the property’s value, and paid at a rate set by HMRC.

It would be payable by the new owner of the property, only on the amount above £500,000.

The second part of the plan would see council tax replaced with a new “local” property tax. This would be calculated relative to the property value paid by the owner, and at a rate set by each local authority.

The report on which the plans are reportedly based argues that the tax should be levied on values up to a cap of £500,000. This would ensure that the richest areas are not able to set far lower rates than those with less valuable properties.

This would address a key criticism of the council tax system – that how properties are valued is unfair and inaccurate. The “band” of council tax that all properties pay is based on values last evaluated in the 1990s, which have become drastically outdated in many places.

The local property tax concept would instead see tax liable on properties based on their value at the last point they were sold, meaning valuation would be regularly updated.

In the UK, capital gains tax is payable on the sale of most high-value assets. This includes property, stocks and possessions worth over £6,000.

Under current rules, a homeowner does not generally need to pay capital gains tax on the sale of a property which has been their primary residence during the time they have owned it.

This would change under the proposed plans when the value of the property of the house being sold is worth £1.5m or more, although this threshold is said to be under consideration.

The way capital gains tax works for property sales requires sellers to calculate the “gain” they have made on the asset. This is usually the difference between what they paid for the property and the amount they sold it for.

If this is above, or takes the seller above, their capital gains tax allowance – £3,000 every year – they will need to report and pay the tax.

For higher or additional rate income tax payers, the rate is 24 per cent. For those on the basic rate, it’s 18 per cent.

Another, more simple version of the ‘mansion tax’ has also been floated closer to the Budget. This would see a levy placed on owners of properties worth at least £2m, who would face an annual charge of 1 per cent of the amount over that threshold – meaning a £10,000-a-year fee for homes worth £3m.

Another lever Ms Reeves could pull is changes to pension policy, which may aim to pull some funds from wealthier retirees.

Analysts at LCP, including former pensions minister Steve Webb, have warned against the move, sharing their view on how the chancellor could seek to change pensions.

One of the most widely speculated is a cut to the higher rates of pension tax relief. This is the policy that effectively boosts savers’ contributions with a top-up from HMRC.

Savers who pay basic rate tax get a 20 per cent boost to their pension contributions, while higher rate taxpayers get 40 per cent and additional rate earners get 45 per cent.

The scheme effectively ensures that no tax is paid on pension contributions. It is designed to encourage people to save more for retirement, as income that would be taxed as wages can instead go virtually untaxed as pension deposits.

The rumoured proposal would see this relief cut back for high earners, meaning everyone gets pension tax relief at a flat rate of 20 per cent, regardless of their income tax bracket.

A report from the IFS last year found that this would create £15bn more a year for the exchequer, “the vast majority of which would come from those who are in the top fifth of earners.”

Source: UK Politics - www.independent.co.uk