Countdown to the Budget: Spotlight on tax

Good afternoon from New Economy Brief.

On Wednesday the Chancellor Rachel Reeves announced that she will deliver her Autumn Budget on 26^th November, fresh on the heels of more jitters in the bond market – 30-year gilt yields reached a 27-year high on Tuesday, pushing long-term government borrowing costs up.  

And as Parliament returns from its summer recess, the Chancellor's dashboard is flashing red: estimates of the size of the government’s fiscal ‘black hole’ range from £20 to £40 billion. This ‘black hole’ is the Office for Budget Responsibilities’ estimate of the projected gap between the government’s current spending and its income from tax and other revenues in 2029/30; Reeves needs to plug it if she is to meet her self-imposed fiscal rules. 

Some bond investors have called for spending cuts. But as eminent economists warned before the Spring Statement, “the last 15 years have taught us that the UK cannot cut its way to growth”. Further cuts would hammer public services already struggling from the consequences of cuts imposed in the 2010s. And after the political storm, backbench rebellion and subsequent U-turn over cutting disability benefits earlier this year, the government’s appetite for spending cuts looks limited. Speculation has been growing that the Chancellor will instead announce tax rises at the Autumn Budget. 

This week, we explore the tax options the Chancellor has available to raise revenue – and how different reforms could impact the economy and public finances. 

The state of the public finances  

Predictions of the size of the fiscal ‘black hole’ vary, with the National Institute of Economic and Social Research (NIESR) estimating a deficit of as much as £41.2 billion. Other estimates are closer to £20 billion. Given the Chancellor’s repeated insistence that her commitment to its fiscal rules is ‘ironclad’, this presents a problem. The government’s argument so far has been that economic growth will plug the gap. But relying on growth is risky – especially as UK GDP growth remains sluggish. 

The situation – low growth, persistent inflation and economic uncertainty – has led some economists to compare the government’s current position with the 1970s, when the UK was forced to take out an emergency loan from the International Monetary Fund. This prognosis may be "well wide of the mark", with Michael Saunders, former member of the Bank of England’s Monetary Policy Committee, calling it “complete nonsense” and “just hysteria”. Nevertheless, the comparison is not one Reeves will enjoy. 

The long lead-in to the Budget does leave time for the warning lights on the Chancellor's dashboard to stop flashing so urgently. But relying on the economic picture changing drastically for the better before November is risky – hence the widespread expectation that Reeves will raise taxes. 

Tax options on the table.  

Over recess, speculation ramped up about which taxes the Chancellor is considering. Given the Labour Party’s 2024 manifesto pledged not to increase taxes on "working people", including VAT, National Insurance (NICs) and income tax, most of these reports have focused on more niche options to raise revenue, particularly those that apply to currently under-taxed groups. Here’s a rundown of some of the ideas being floated and how they could work in practice:  

NICs on rental income. The Treasury was recently rumoured to be considering the expansion of National Insurance contributions (NICs) to include rental income, which could raise around £2 billion. Labour sources told the Times that property income was “a significant potential extra source of funds”, and that focusing on landlords is seen as a way of targeting “unearned revenue”. 

Property tax reform. A rumoured property tax – which would replace Stamp Duty Land Tax (SDLT) –  was one of the more eye-catching of the reforms floated over the summer. Campaigners from across the political spectrum – including Fairer Share and the Onward think tank – have long argued that SDLT should be replaced with a “proportional property tax”. Onward’s report on property taxes, said to be influential with the Treasury, calls for a levy of 0.54% on the value of a home above £500,000. A higher rate would apply above £1,000,000.  

CGT on Primary Homes. Currently, income from selling a primary home is exempt from Capital Gains Tax (CGT), which usually applies only to properties that aren’t the owner’s primary residence such as a buy-to-let property. The Chancellor is supposedly considering scrapping this exemption on homes worth over £1.5 million. However, Tax Justice UK’s Faiza Shaheen argues that this would create a disincentive to sell property and stifle the housing market. 

NICs on Partnerships. Whether or not the Chancellor is considering the expansion of NICs to include rental income, she may also look to apply this to partnerships. The two main forms of multi-owner business in the UK are companies and partnerships but currently, partners do not pay the equivalent of Employer NICs. 

A report published this week by CenTax argues that scrapping this “tax break” would raise £1.9 billion in 2026-27. The authors describe this as “an accident of history that is damaging productivity and growth”. Partnerships often operate in industries like law, finance and professional services, and CenTax finds that introducing a version of Employer NICs for partnerships would mainly affect top earners – it estimates that almost half of the revenue raised would come from the top 0.1%.  

Farmers tax reforms? Rachel Reeves may also wish to use the Budget to repair relations with groups she upset at the last Budget. Another CenTax report, published in August, suggests how Inheritance Tax reforms announced last year could be better targeted by introducing a ‘minimum share rule’ and an upper limit on relief. This could bring in more revenue from richer landowners, potentially freeing up funds to raise the relief allowance for working farmers.  

What about a wealth tax? The Chancellor has so far ruled out introducing a wealth tax, and the Institute for Fiscal Studies argues that reforming existing taxes such as CGT would be easier and faster to implement. However, there is mounting pressure for Reeves to reconsider. Tax Justice UK (TJUK), for example, is calling for a 2% levy on individuals with assets worth more than £10 million – a measure it says would affect 0.04% of the UK population while raising £24 billion a year. As TJUK points out, 75% of the public are in favour. 

And earlier this summer former Labour leader Neil Kinnock called on the government to implement such a tax, noting that as well as bringing in revenue it would send a clear moral message to the voters that “we are the government of equity … This is a country which is very substantially fed up with the fact that whatever happens in the world, whatever happens in the UK, the same interests come out on top unscathed all the time while everybody else is paying more for getting services.”

All eyes on the Budget

With a potentially wide fiscal gap, jittery markets and sluggish growth, the challenges facing the Chancellor as she prepares for the Budget are multiple. If she continues to stick to the manifesto commitment not to increase the three big taxes – income tax, National insurance and VAT – and steers clear of spending cuts, she will need to rely on more targeted tax rises to meet her fiscal rules. These have the potential to raise significant revenue, but as always when it comes to tax, there are risks – not least political risks – attached. But this Budget is also an opportunity for Reeves to make bold, progressive – and in some cases, long overdue – changes to the UK’s tax system, for example through taxing property and wealth. The question is, how bold will she be? With nearly three months until the big day, get ready for weeks of speculation…