£22bn Tax Boost: How Rachel Reeves Could Fill the ‘Black Hole’?

Chancellor Rachel Reeves has highlighted a £22bn “black hole” in public finances, necessitating tax increases to fill it. Despite pre-election promises restricting increases in Income Tax, national insurance, VAT and Corporation Tax, there are still ways to raise the required funds.

UK Tax Receipts in 2023/24

Labour's commitments limit options, leaving about £150bn in taxes to explore:

Potential Revenue Sources

Pension Tax Relief

One potential source of revenue is Pension Tax relief. Currently, high earners receive up to 45% tax relief on pension contributions. By capping this relief at 30% or even 20%, the government could raise between £3bn and £15bn. However, this move might prompt high earners to shift their investments to other products, leading to complex secondary effects.

Limiting Inheritance Tax Reliefs

Another option is limiting Inheritance Tax reliefs, which could raise around £2bn. For example, investments in AIM shares or foreign companies that are not on a recognised stock exchange are currently exempt from Inheritance Tax. Closing these loopholes would ensure that estates like those of the Duke of Westminster are taxed more equitably.

Reforming Pensions Inheritance Tax

Reforming pensions Inheritance Tax could also generate about £1bn. Presently, pensions inherited from individuals who die before age 75 are tax-free, while those inherited from individuals who die after age 75 are subject to PAYE. Applying a standard 40% Inheritance Tax to all inherited pensions would align their treatment with other assets.

Increasing Capital Gains Tax

A modest increase in Capital Gains Tax might raise an additional £1-2bn. This would involve aligning the Capital Gains Tax rate more closely with Income Tax rates. However, to avoid a rush of disposals before the rate change, it would need to be implemented immediately.

Closing the Stamp Duty Loophole for Enveloped Commercial Property

The government could address the stamp duty loophole for enveloped commercial property, where high-value commercial properties are sold via single-purpose companies to avoid higher stamp duties. Applying the standard 5% SDLT to these transactions could easily raise over £1bn.

Additional Revenue Options

Increasing ATED (Annual Tax on Enveloped Dwellings)

Increasing the Annual Tax on Enveloped Dwellings (ATED) is another straightforward option. ATED was introduced to deter holding residential property in single-purpose companies to avoid stamp duty but currently raises only £111m. Tripling the rates could significantly boost revenue.

Increasing Inheritance Tax on Trusts

Inheritance Tax on trusts could be increased by raising the ten-year charge from 6% to 9%, potentially bringing in an additional £500m. This would create a more equitable tax treatment compared to the 40% Estate Tax.

Reversing the Fuel Duty Rise Cancellation

Reversing the fuel duty rise cancellation could instantly generate £3bn. However, this would disproportionately affect median and lower-income earners, making it a politically sensitive option.

Abolishing Business Asset Disposal Relief

Abolishing business asset disposal relief, which provides a reduced Capital Gains Tax rate for business disposals, could raise £1.5bn. This relief is often exploited and offers limited benefit to genuine entrepreneurs.

Rachel Reeves Plan for Property and Vehicle Tax Reforms

Council Tax Increases for Valuable Properties

Reforming Council Tax for high-value properties could raise between £1bn and £5bn. By uncapping Council Tax or adding higher bands for expensive properties, the government could ensure a fairer tax distribution.

Increasing Vehicle Excise Duty

Vehicle excise duty could be increased by a small amount, raising over £200m. While this would also affect lower-income individuals, the overall impact would be less significant compared to other tax hikes.

More Controversial Options

Ending the Pension Tax-Free Lump Sum

Ending the Pension Tax-free Lump Sum could generate £5.5bn. Currently, retirees can withdraw 25% of their pension pot tax-free, up to £268k. Limiting this benefit would primarily affect higher earners but might be seen as unfair to those who planned their retirement under the current rules.

Reducing the VAT Registration Threshold

Reducing the VAT registration threshold could bring in £3bn. Lowering the threshold would mean more small businesses paying VAT, which could drive economic growth but might face resistance from the small business community.

Raising the Top Rate of Income Tax

Increasing the top rate of Income Tax could raise less than £1bn. Although politically symbolic, this measure would break Labour’s campaign pledge not to increase Income Tax.

Wealth Tax

Finally, a Wealth Tax targeted at the very wealthy could theoretically raise significant sums, but practical experience from other countries suggests this approach is often unsuccessful and difficult to implement.

Implementing a combination of these measures could help raise the £22bn needed, with Pension Tax relief caps being a particularly significant source of revenue.