Which taxes may the UK budget increase?

Chancellor Rachel Reeves has cautioned that “difficult decisions” on taxes, expenditure, and benefits will be part of her first budget.

Reeves stated shortly after Labour came to office that raising taxes would be necessary to close what it described as a £22 billion “hole” in the public coffers.

According to government sources earlier this month, the chancellor plans to implement spending cuts and tax increases totaling £40 billion in the upcoming Budget, which is scheduled for October 30.

National Insurance, income tax, and value-added tax (VAT) have all been excluded from tax increases for “working people” by Labour.

1. A “stealth tax”

A stealth tax is a method of collecting money that isn’t specifically called a tax or meant to be one. The former government implemented a program that freezes income tax and national insurance thresholds until 2028. According to reports, the chancellor is currently considering a strategy to extend the freeze past that point.

A phenomenon known as “fiscal drag” causes more people to be “dragged” into paying higher tax rates as their salaries increase, hence the policy essentially raises taxes.

2. Diminish the pension tax exemption

Up to certain limits, individuals or their employers who contribute to private pension plans are exempt from paying taxes on those contributions.

The relief enables a person to put some of their wages into retirement savings rather than having them taxed by the government.

3. Duty on fuel

The amount of fuel duty, a tax imposed on the purchase of gasoline, diesel, and other fuels, should affect the price that drivers pay at the pump.

According to the Office for Budget Responsibility, the tax represents a “significant source” of funding for the government, with an estimated £24.7 billion earned in 2023–2024.

4. The tax on capital gains

Reeves may also choose to pay capital gains tax (CGT) as an alternative.

This fee is applied on the profit from the sale of an asset whose value has increased; stocks that are not held in ISAs or second houses are two examples of rates that are significantly lower than income tax, according to critics. Wealthier people may profit from this, and Reeves may decide to level the playing field or eliminate some corporate CGT tax benefits.

5. The tax on inheritance

A deceased person’s estate over £325,000 is subject to inheritance tax, which is currently paid at a rate of 40%. If the estate is worth less than £325,000, no tax is due.

6. Employer contributions to National Insurance

Despite the Labour Party’s election manifesto’s prohibition on raising National Insurance (NI), it is more likely that businesses will increase their NI payments. Employers are now exempt from the tax on pension contributions paid by employers, however, companies still pay NI at a rate of 13.8% on all employees’ wages over £175 per week.

To increase revenue, Treasury officials are looking into NI on employer pension payments.

Despite the UK’s significant economic boost, there is a “lingering” inflation concern.

According to a biennial assessment that raises its output projections for this year and next, the UK’s economy is among those exhibiting “robust” growth, despite the country still being vulnerable to “lingering” inflation.

According to the Organisation for Economic Co-operation and Development (OECD), the UK’s GDP increased by 1.1% this year, outpacing the growth of the euro region as a whole. This is in contrast to the 0.4% estimate it made for 2024 in May. When the UK emerged from the recession of the second half of 2023, the upgrade was largely a reflection of the better-than-expected performance observed in the first half of the year.