How the Government Could Fill the £22 Billion Budget Gap?

UK Chancellor Rachel Reeves has publicly stated numerous times that the nation’s economy is facing a £22 billion “black hole.” She and the present Labour government plan to fill this hole. However, before the election, the party promised not to raise Income Tax, National Insurance, VAT or Corporation Tax.

So, what areas could the government target to raise this amount? Considering we are less than a month away from presenting the Autumn Budget, let us look at the avenues the government could explore.

What Sectors Could the Government Target in the Autumn Budget 2024?

Without major tax reform, Labour will need to look for smaller, incremental tax increases through various areas, areas like the following:

• Pension Tax Relief – Pension tax relief is currently fully tax-deductible. To put it simply, if you are a high earner paying a 45% marginal rate, you get 45% tax relief on your pension contributions. Reducing this tax deduction to 30% or 20% could generate up to £15 billion in revenue, but taxing withdrawals at higher rates (for instance, 40%) might push high earners to seek other investments. So, this is a complicated matter.
• Limiting Inheritance Tax (IHT) reform – Limiting Inheritance Tax reliefs and closing loopholes could raise around £2 billion. Currently, estates avoid 40% tax by holding AIM shares. AIM, or Alternative Investment Market, is a small part of the London Stock Exchange. An AIM Individual Savings Account (AIM ISA) is a portfolio of AIM shares, and investing in them can exempt you from inheritance tax. Estates have also been known to hold shares in unrecognised foreign exchanges to avoid IHT. Clamping down on means perceived to be unfair can help raise revenue without much opposition.

• Eliminate the Stamp Duty “loophole” – High-value commercial properties are often sold through single-purpose companies, avoiding the 5% Stamp Duty Land Tax (SDLT) and instead paying just 0.5% stamp duty reserve tax, or none if offshore companies are used. Closing this loophole by applying 5% SDLT to these transactions could raise over £1bn and is technically simple to implement.
• Increase Capital Gains Tax (CGT) – Raising Capital Gains Tax could generate around £1 billion. Though a modest increase could be necessary, a larger hike in CGT would require reintroducing relief for inflationary gains, reducing potential revenue.
• Increase Annual Tax on Enveloped Dwellings (ATED) –This move could raise over £200m. This tax was introduced to discourage the use of single-purpose companies to hold residential properties to avoid stamp duty. However, it is ineffective because the tax rate is too low. There’s a strong argument for tripling the rate to boost revenue.

Conclusion

In conclusion, there are several measures available to raise revenue and fill the multi-billion pound gap in public finances. However, the government must tread carefully to avoid unintended consequences while ensuring fairness and efficiency in the tax system.