Proposed Budget measures pass ‘triple tax test’

It is no secret that this October’s Autumn Budget will be an unpleasant one for many taxpayers. The Chancellor has promised to make ‘hard decisions’ while the Prime Minister warned it will be ‘painful’. However, one think tank has proposed measures that it says could raise £20 billion and go a long way to filling the country’s fiscal blackhole. Here we take a look at the proposals in more detail.

Triple test

The Resolution Foundation has suggested that reforms to Inheritance Tax (IHT), Capital Gains Tax (CGT) and National Insurance (NI) could raise more than £20 billion a year.

The Foundation said that the reforms could also pass a ‘triple tax test’ of improving tax efficiency, making sure that tax rises fall on those with the broadest shoulders and not breaching manifesto commitments.

Dead cert

There is widespread speculation of over what Chancellor Rachel Reeves may announce in her first Budget. The Resolution Foundation notes that tax rises are a ‘dead cert and a time-honoured tradition’, because, since the 1990s, taxes have gone up by an average of £21 billion over the first two fiscal events after an election.

The government has inherited £24 billion of tax rises announced by Jeremy Hunt and it hasn’t signalled any intention to reverse these.

The Foundation says that while the scheduled rises in Fuel Duty – on track to exceed 6p per litre in 2025 – should remain in place, the ‘damaging rise in Stamp Duty next April’ should be ‘cancelled so as to boost mobility’, at a cost of £1.8 billion.

Limited options

The £10 billion of tax rises in the Labour manifesto are also likely to be confirmed, says the Foundation.

In addition, the Chancellor has limited her revenue raising options by pledging not to raise the main rates of income tax, corporation tax, VAT or NI. In spite of this self-imposed constraint, the think tank says it is possible to raise around £20 billion a year and improve the efficiency of the tax system in the process.

Ripe for reform

CGT is ripe for reform, says the Foundation, as rates are unjustifiably lower compared to those on other forms of income. For example, employment income faces a top rate of tax of 53% on their earnings, but some capital gains face a top tax rate of only 20%.

To address this, the Foundation proposes aligning CGT rates for shares with dividend tax rates, taxing property capital gains like wages, introducing CGT exit charges when moving country and applying it at death. Dividend and rental income tax rates should also be reformed, it adds.

But these changes should be balanced with the reintroduction of inflation-indexing so as to create a tax-free rate of return which would particularly benefit long-term investments. Together this package of reform could raise anything up to £12 billion, the Foundation says.

Inconsistent and unfair

According to the Foundation, the taxation of pensions is ‘inconsistent and unfair’. So, it says, the Chancellor’s best option would be to levy employer NI on employers’ pension contributions.

The think tank says that doing this at the same time as abolishing NI on employees’ pension contributions would leave a typical worker saving via auto-enrolment better off, while still raising £9 billion overall, and would level out current arbitrary tax biases between different workers’ savings.

Closing loopholes

The Chancellor should also close loopholes in IHT that allow the very wealthy to avoid paying their fair share and undermine public trust in the tax system, says the Foundation. Ending business and agricultural reliefs and bringing pension pots into IHT would raise £2 billion, according to the think tank.

The Foundation adds that as well as introducing these tax measures immediately, the government should get the ball rolling on important longer-term tax reforms to Business Rates, Council Tax and road pricing.

The Autumn Budget

The Chancellor will deliver the Autumn Budget to Parliament on 30 October. 

Whatever changes are made Mercia’s tax experts will be watching and will provide detailed analysis of the day’s announcements. Keep your clients up to date with our range of digital and printed products.