With a new government in place, all eyes are on Rachel Reeves, the new Chancellor of the Exchequer, as she prepares her 2024 October budget. Reeves has a tough job ahead, needing to find £22 billion to plug a hole in the government’s finances. The problem is that she’s promised not to increase Income Tax, VAT, National Insurance, or Corporation tax. So, where does this leave her?
The £22 billion dilemma
The key problem for Reeves is that she’s boxed herself in by ruling out any increases in major taxes, which together generate about 72.35% of the government’s income.
In the 2023/24 fiscal year, tax revenue was estimated at £950.5 billion, so the £22 billion hole is around 2.3% extra income. Since the big-ticket taxes are off the table, she’s left to juggle smaller taxes that account for less than 28% of revenue. So, to make up the £22 billion, Reeves would need to squeeze an 8.4% increase from these smaller taxes – a tricky task requiring numerous small tax hikes.
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Where could Reeves turn?
Reeves has limited options, but some taxes are already rumoured to be in her crosshairs. Here’s a breakdown of potential adjustments she could make to her October budget:
- Inheritance tax and capital gains tax: These taxes only currently bring in about £25 billion between them so they would have to significantly increase to make a discernible difference.
- Pension tax relief: Reeves could reintroduce the lifetime cap on pensions or reduce the tax relief on pension contributions, which would generate additional revenue without hitting the lowest earners directly.
- Stamp duty adjustments: Tweaking Stamp Duty, especially for ‘enveloped property’ (property held in company structures), could bring in extra cash.
- Fuel duty: Fuel duty has been frozen for many years under Conservative governments, but a rise here could be on the table. It’s a classic ‘easy to raise’ tax that has a widespread impact.
- Council tax increases: Local authorities could be given the green light to raise council taxes further, passing the burden down to homeowners.
- End the pension tax-free lump sum: Removing the tax-free status on pension lump sums could also help bridge the gap.
- Tax on gambling winnings: Introducing a tax on gambling winnings could bring in revenue from the booming betting industry.
- Lower the VAT threshold: Reducing the VAT threshold would mean more small businesses need to charge VAT, passing the burden to consumers and small business owners.
- Raise the top rate of income tax above 45%: Although this is more of a political statement, a symbolic increase could slightly boost revenue without significant financial impact.
Should Reeves break her own rules with a radical approach?
In reality, Reeves might need to consider biting the bullet and reversing her stance on the bigger taxes. If they put income tax up and reverse the 2% reduction in National Insurance, this would directly address the £22 billion gap more effectively than tinkering with smaller taxes.
Yes, it would be unpopular – but it also brings a bit of financial reality back into government finances.
The October budget’s impact on business and individuals
Rachel Reeves faces a tough balancing act in her October budget. While she has ruled out increasing the most significant taxes, the range of smaller tax increases she might employ could still have broad implications for businesses and individuals. But that’s a topic for the next blogs in the series.
Wondering how these potential tax hikes could impact your business? Get in touch at [email protected] and we’ll talk you through it, helping you plan your next steps.
