Are Higher Taxes Incoming? Chancellor Rachel Reeves Faces Tough Decisions

Sir Keir Starmer soared to the top spot of UK politics on the 4th July 2024 with a string of promises. One of the key ones for voters will have been Labour’s promise “not to raise taxes for working people” if they were to win the General Election. 

Experts at the time pointed out the rather clever wording, and critics often pushed Labour party members to provide more detail, but they toed the party line and refused to elaborate. With Rachel Reeves ordering a full audit into the state of the UK’s finances the very same day she took over the role as Chancellor from the Conservative’s Jeremy Hunt, those critics became even more suspicious of Labour’s intentions.

Over the 27th-28th July 2024 weekend, just over 3 weeks from the date Reeves took over, a £20 billion black hole in UK finances was announced, and breaking from tradition still further, the Chancellor decided that she would be an open book about the state of those finances, explaining, in detail, where that money was missing in a speech on Monday 29th July.

What Does This Mean For UK Working People And Businesses?

Well, financial commentators and experts are now convinced that higher taxes are incoming, but it might not affect UK business owners and workers in the ways we would expect.

Labour are still absolutely committed to not raising taxes on working people – that means no rise in National Insurance, Income Tax or VAT. For workers, then, there may be less to worry about.

As for UK businesses, Labour also committed to not raising corporation tax above 25%, meaning UK businesses won’t be hit too hard in any future tax rises expected to be announced in the Autumn statement.

But there’s no denying that Labour seem to be teeing up for some tax rises but what will they be?

The Chancellor’s Options

If Labour stick to their campaign pledges (which they would be wise to do so early on in their tenure at the top, lest they lose voter trust), then the Chancellor is limited in her options, but we could see a number of key tax rises. These tax rises would technically be in line with their campaign promises, but will almost certainly leave a bitter taste in some voters’ mouths. In fact, some economic experts argue that a tax rise in anyway is a break from Labour’s promises, as it will be working people who are hit by any tax rise.

Be that as it may, Labour will need to fill the alleged £20 billion hole somehow, and raising tax may be their only option. Some possible tax rises include:

• Higher taxes on Pension Savings – the current tax relief on offer to those putting money into their private pensions differs depending on Income Tax paid. Some pay 20, 40, or 45% tax on their pension contributions. Reeves is allegedly considering a flat rate of 30% for all pension tax contributions, expected to bring in an estimated £3 billion each year.
• Closing tax exemptions on Inheritance Tax – currently Inheritance Tax is paid upon a person’s death if their estate is worth over £325,000 at 40%, but only on the value above £325,000. In 2023/24 this raised £4 billion. However, there are certain exemptions around inheritance tax that act as loopholes. These include tax free passing of pension pots, business relief, and passing on agricultural land without tax. By closing these loopholes, £4.8 billion per year could be raised by 2029 according to experts.
• Council Tax changes – less likely, though not impossible, council tax is criticised as an outdated method of taxation as it’s based on house prices from 1991. Updating the system for council tax to be based on modern house prices could raise significant money, but Labour suggested that this wouldn’t happen during the campaign. A lack of council tax talk in the manifesto, however, could leave the door open to council tax changes in light of this unexpected financial black hole.
• Raising Capital Gains Tax – CGT is paid when personal assets are sold for more than the individual paid for that asset – exempting houses, cars, and business assets. There is a tax free allowance of £3,000 in place currently, and by changing the taxation bands to be more similar to income tax, a figure north of £5 billion could be found.

Tax rises of any kind will inevitably impact businesses and individuals in the UK, however the government try to sugarcoat it. That’s a fact. Those tax rises, if any, will impact different groups of people in different ways, but we won’t know exactly what will happen until the Autumn statement later this year.

Real Business will, of course, report on the Autumn statement to analyse what impacts Labour’s plans will have on UK businesses and workers as soon as it’s delivered.

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