Hiking Capital Gains Tax is the frontrunner when it comes to potential tax increases in next month’s Budget, Labour insiders and economists have told The i Paper.
Andy Burnham and the Chancellor John Healey are mulling whether to raise taxes in their first Budget on 28 October.
An increase in the UK’s borrowing costs and the economic fallout of the Iran war has slashed the £24bn “headroom” which the Government holds against its fiscal rules constraining borrowing.
If Healey wants to rebuild the headroom, he will have to either increase taxes or cut spending.
A source close to Downing Street said that increasing CGT would be high on the list of measures being considered by the Treasury.
Why CGT is favourite
CGT – paid on the profit of the sale of an asset such as a second home or shares – currently sits at 18 per cent for basic-rate income taxpayers and 24 per cent for higher and additional-rate taxpayers.
Increasing CGT has previously been backed by Burnham’s second-in-command, First Secretary of State Louise Haigh and the Defence Secretary Wes Streeting – albeit both before their roles in Burnham’s Cabinet were confirmed.
How much money raising CGT would bring in is fiercely contested. The Institute for Public Policy Research think-tank has claimed it could raise £14bn a year, but sceptics suggest that equalising it with income tax rates could actually end up costing the Treasury money if people delayed asset sales or relocated overseas.
The source close to Downing Street said that Treasury officials would be mindful of the “risk” of discouraging entrepreneurialism if rates went to high.
A Labour MP said there was “obviously political interest from the Parliamentary Labour Party” in increasing CGT, but agreed that any change would have to be carefully calibrated to avoid damaging the economy. “You’ve got to balance the political reality in the PLP with the raw economics,” they said.
It comes as Healey faces a difficult first Budget, with the need to find money to fill a £4.7bn gap in defence funding, and help with the cost of living. But with the tax burden already at a record high – exceeding £1 trillion this year – he is limited in the choices he can make, especially in view of the pledges to try and ease the cost of living burden.
Raising any of the big three taxes – VAT, Income Tax and National Insurance – which account for 70 per cent of tax, are ruled out due to manifesto commitments.
‘Political momentum undeniable’
Economists at the leading accountancy firm Blick Rothenberg say Capital Gains is the most likely tax to be raised
John Bull, a partner at the firm, said: “The political momentum over Capital Gains Tax is undeniable. In 2024/25 there were record CGT receipts – they rose by 89 per cent to £24.2bn. £1.38bn was in crypto currency gains. The increase is staggering in my eyes. CGT taxpayers were at an all time high of 584,000 people (a 45% increase in the number of taxpayers paying CGT).”
He added however that any raise would not be large: “It’s an optional tax – you can choose when to sell an asset. Economists anticipate that CGT receipts would actually diminish at a rate greater than 30 per cent.”
“I think aligning with income tax would need a complete overhaul of CGT. So a nominal increase is on the cards, to (at most) 30 per cent for higher rate.”
He added that this was because going any higher would be the point at which people would avoid selling assets and so receipts would actually diminish.
Nimesh Shah, the chief executive of the firm, said that the freezing of tax bands until 2030, which has already seen three million more people dragged into tax rates, and another three million into higher bands since they were frozen in 2021, known as fiscal drag, is already a built in tax rise.
“There has been a huge spikes in tax takings in the last six years. Fiscal drag is generating so much there’s no need to do anything else,” he said.
Burnham vows ‘prudence’
On Wednesday, Burnham told journalists that the Budget would be “challenging” and vowed “prudence” with the public finances – a potential signal towards tax rises.
“It is going to be challenging, because the picture around the world is challenging, particularly the situation in the Middle East, and we will look carefully at all those things,” he said.
“We won’t take risks with people’s living standards or with the economy as a whole, so we will take it all into account.”
He added: “It will mean taking whatever action we can to help people while also making sure we apply the highest degree of prudence to the running of the economy.”
Other tax measures reported to be under consideration include increasing taxes on banks or raising the windfall tax on oil and gas profits.
The source close to No 10 said that they would be “surprised” if the Treasury was not looking at these measures.
However they said Burnham and Healey were probably “still weighing” whether to opt for a radical budget or something “more modest”.
The source said that there was “going to have to be at some point a reckoning on government finances”, although it was not clear it would be in this Budget.
They said there was a danger that undertaking a big round of fiscal consolidation – tax increases or spending cuts – at this point would crush the UK’s surprisingly resilient growth.
A more modest Budget could meanwhile signal that Burnham is gearing up for an earlier election, they suggested.
The Labour MP said they were expecting a “mix” of tax increases and spending cuts in the Budget. “It’s going to be tough. Labour MPs aren’t thinking about it yet, and they’re not necessarily anticipating how tough it will be,” they said.
On Tuesday, Paul Johnson, a former director of the Institute for Fiscal Studies and one of the country’s most respected economists, said that a decision taken by the former chancellor Rachel Reeves to pencil in spending cuts “right across Whitehall outside of defence and health” in 2028-29 and 2029-30 could push Burnham to either increase taxes or opt for an early election.
Speaking at an event organised by the Institute for Government think-tank, Johnson said: “We will see in this year’s Budget whether we get more action on the tax side.”
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