Rachel Reeves will break Labour’s manifesto pledge not to increase taxes on working people if she extends the freeze on personal tax thresholds, leading economists have warned.
The Chancellor is expected to raise taxes in her Budget next month as she grapples with a black hole that could be as large as £50bn.
She is rumoured to be looking at increasing property taxes and other levies on assets as a way to avoid breaching the promise not to burden “working people”.
The Institute for Fiscal Studies, in a major report on Reeves’ tax choices, said she could raise around £10.4bn a year from 2029-30 by extending the freeze on thresholds for income tax and national insurance contributions – a move she has made in the past.
But the report warned that this would be a breach of the manifesto pledge not to raise taxes on working people, if it also included a freeze to National Insurance contribution thresholds.
While it would not technically mean an increase in the rate of income tax, national insurance or VAT, which the Labour government has pledged to avoid, a further freeze on thresholds would pull many more working people into higher rate bands under the process of fiscal drag.
Axing stamp duty ‘a good end goal’
The report suggested the Chancellor could raise tens of billions of pounds from reforms to the tax system, including an overhaul of council tax with higher rates for more valuable properties, as the current system is based on 1991 house prices.
And a “good end goal” would be to replace stamp duty on housing and council tax with a “new recurrent property tax” proportionate to updated market prices.
Rachel Reeves mixes gin with Jared Brown, co-founder of Sipsmith, as she visits the Sipsmith distillery in Chiswick, last week. (Photo: Paul Grover/Pool via Reuters)While council tax rates are already assumed to rise by 4.3 per cent per year for the rest of the parliament, “larger increases would be needed to bring in additional revenue”, the IFS report says, adding: “An alternative to raising all rates further would be to increase rates on homes in higher value bands. This would make council tax less regressive.
“But because council tax bands in England and Scotland are still based on 1991 valuations, the increases would not accurately target the properties that are most valuable today. A sensible goal would be to move to a tax that is proportional to up-to-date property valuations.”
Doubling council tax rates on the top two property bands would raise £4.4bn.
While any extra cash from changes to council tax would flow to local authorities rather than central government, Reeves could in turn reduce the grants paid to local authorities if she wanted to bolster the Treasury’s coffers, the IFS said.
The IFS urged the Chancellor to resist “simply hiking rates” without making other changes to an “unfair” and “inefficient” tax system.
It also warned that restricting income tax relief on pension contributions “should be avoided” and repeated its cautions against an annual wealth tax, which it says would penalise savers, or increasing stamp duty.
Other options available to the Chancellor
Among the other options available to the Chancellor as set out by the IFS are:
Ending capital gains tax relief on death, which allows for assets to be inherited without paying CGT on the increase in value over the deceased person’s lifetime, to raise £2.3bn in 2029-30. Reforming death duties to abolish the additional £175,000 tax-free allowance that can be used when passing on a primary residence to a direct descendant, raising around £6bn. Increasing the bank levy and the bank surcharge, which taken together will already raise a total of £2.4bn in 2025-26. A one percentage point increase in the bank surcharge would raise around £0.4bn in 2029-30. Tackling non-compliance to narrow a widening corporation tax gap between the amount of tax the Government thinks should be paid and how much it actually collects.The IFS said: “It would be possible for the Chancellor to raise tens of billions of pounds a year more in revenue without breaking the letter of Labour’s manifesto promise not to increase the ‘big three’ taxes. But doing so would not be straightforward.”
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Isaac Delestre, a senior research economist at the think tank and an author of the chapter, said Reeves would have “fallen short” if she limits her ambition to a dash for revenue without wider reform.
“Almost any package of tax rises is likely to weigh on growth, but by tackling some of the inefficiency and unfairness in our existing tax system, the Chancellor could limit the economic damage,” he said.
“The last thing we need in November is directionless tinkering and half-baked fixes. There is an opportunity here.
“The Chancellor should use this Budget to take real steps down the road towards a more rational tax system that is better geared to promoting the prosperity and well-being of taxpayers.”
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