Rachel Reeves is reportedly planning to introduce higher council tax bands for the owners of expensive homes at next month’s Budget in a bid to raise cash.
The rate of council tax is currently charged on residential properties using a system ranked from band A as the lowest value properties, to band H as the highest.
There are a variety of measures which Reeves could take to change the system to try and remedy her cash-strapped Treasury.
Creating additional tax brackets for higher-value properties is seen by experts as one of the simplest and most effective options on the table for Reeves.
Prime Minister Sir Keir Starmer has also refused to repeat his government’s election pledge not to raise taxes on working people, suggesting the Treasury is also considering an increase in income tax.
Reeves to change council tax
A source close to Reeves told the Financial Times: “The idea of increased taxation on high-end homes is well established. The discussion is about how you do it.”
Economists and campaigners have long argued the council tax system is outdated, with current rates applied to homes based on their valuation in 1991, despite the housing market changing massively in the intervening years.
Currently, properties in band H, which pay the highest rate of council tax, are those which were valued above £320,000 in 1991.
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Another source said: “It is vital for the political balance of the Budget, to show everyone is paying their fair share.”
Last month, the Institute for Fiscal Studies (IFS) wanted Reeves to avoid “directionless tinkering” with the tax system when she planned her Budget.
In their annual Green Budget, they called on the chancellor to double council tax on the most expensive properties, which they estimated could raise an additional £4.2bn.
Speaking on the Today programme last month, IFS director Helen Miller said: “Make it a tax based on up-to-date property values, make it proportional, and raise revenue from that rather than the current council tax and stamp duty.”
Other options include revaluing properties in the highest tiers, with homes over a certain value charged extra tax.
Level of fiscal headroom
Reeves and Starmer are under increasing pressure both politically and economically to produce significant improvements in the country’s finances.
A senior Labour source told The i Paper a leadership challenge could be launched in a matter of weeks, partly due to the government’s handling of the economy.
Early last month, 13 Labour MPs wrote a letter to Reeves, calling for the “outdated, deeply regressive, and increasingly indefensible” council tax system to be abolished.
The motivation behind increasing taxes has also been driven by a reduction in the Treasury’s fiscal headroom.
The Office for Budgetary Responsibility (OBR) is understood to have downgraded its UK productivity forecast, leaving Reeves with a hole in public finances which could be as large as £30bn.
Increasing taxes is one obvious way for the Treasury to bridge this gap without increasing government borrowing.
What else could Reeves do?
The Treasury may also be paving the way for an increase in income tax at the Budget on 26 November.
At Prime Minister’s Questions on Wednesday, Starmer would not repeat his manifesto pledge not to increase taxes on working people.
A Treasury source told The i Paper that Labour would have to choose between breaking their manifesto promise, and risking a return to austerity.
Another option Reeves may take is to extend the freeze on the tax allowance threshold, a “stealth tax” which Starmer also would not rule out when questioned on Wednesday.
A No 10 source indicated the Government is looking into tax increases because it wants to increase investment in public services to combat the cost of living crisis.
“We are focused on investing in public services because that is key for productivity and that’s key for people’s livelihoods – growing the economy… the number-one way to make people better off.
“And there will be no return to austerity because that’s exactly what’s hit productivity so hard in this country,” they said.
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