UK Autumn Statement: How Labour Might Tackle the Fiscal Deficit Without Raising Income Tax, National Insurance, or VAT

Introduction

With Labour’s recent election win, attention is now focused on their upcoming Autumn Statement, which will reveal their plans to address the so-called “fiscal black hole.” Labour has already ruled out increasing income tax rates, National Insurance, or VAT, narrowing the options available to raise the necessary revenue. This blog explores the potential tax changes Labour might consider, the pros and cons of each, and the impact on both the government and the public.

Labour’s Promise: No Increases in Income Tax, National Insurance, or VAT

Labour has committed not to raise tax on working people by no increasing income tax, National Insurance, or VAT. While this decision may provide reassurance to many working families and businesses, it also significantly limits the government’s ability to generate revenue. These three taxes collectively account for a substantial portion of the UK’s tax income, so ruling out increases here means the government will have to explore other avenues.

Where Could the Tax Rises Come From?

With the most straightforward options off the table, Labour may need to look at other taxes and revenue-raising measures. Here are some potential areas where changes could be made:

1. Increasing Corporation Tax Rates

One area that Labour might target is Corporation Tax, which is paid by companies on their profits.

• Pros for the Government:
  Raising Corporation Tax could generate significant revenue without directly affecting individual taxpayers. This move could be positioned as a fair measure, ensuring that profitable businesses contribute more to public finances.
• Cons for the Government:
  Higher Corporation Tax might discourage business investment, as companies could see reduced post-tax returns on their investments. It could also make the UK less competitive compared to other countries with lower corporate tax rates, potentially impacting economic growth and employment. Businesses have had thier rates increased from 19% to 25% recently and a move to increase them further could signal “Britain is closed for business”.
• Pros for the Public:
  Increasing Corporation Tax might be seen as a fair approach, asking profitable businesses to shoulder a larger share of the fiscal burden. It could also fund essential public services, benefiting society as a whole.
• Cons for the Public:
  The potential downside is that businesses might pass on the costs to consumers through higher prices or reduce their workforce, affecting jobs and wages.

2. Reforming or Increasing Council Tax

Labour could look at reforms to Council Tax, potentially increasing rates or revising property value bands.

• Pros for the Government:
  Council Tax is a stable and reliable revenue source for local governments. Adjusting rates or bands could provide additional funding for essential public services, such as education, social care, and public safety.
• Cons for the Government:
  Raising Council Tax could be politically sensitive, particularly in regions where property values are high but incomes are not. It may also exacerbate regional inequalities, as council revenues vary significantly across different areas.
• Pros for the Public:
  Reforming Council Tax could make the system more equitable, ensuring that those with higher-value properties pay a fairer share. Additional revenue could enhance local services that directly benefit communities.
• Cons for the Public:
  Higher Council Tax could place additional financial strain on households, particularly those on fixed incomes, such as pensioners, or in areas where property values have risen faster than wages.

3. Introducing a Wealth Tax

A wealth tax on high-net-worth individuals or those with substantial assets has been a topic of discussion as a way to raise revenue. More progressive parties, like the Greens, have argued for a wealth tax for some time.

• Pros for the Government:
  A wealth tax could provide a significant revenue source and align with Labour’s agenda of reducing inequality. It targets those with the greatest ability to pay, making it politically appealing to a wide range of voters.
• Cons for the Government:
  Implementing a wealth tax could be administratively complex and expensive. It might also encourage capital flight, where individuals move their assets or change their tax domicile to avoid the tax, potentially reducing its effectiveness.
• Pros for the Public:
  A wealth tax could help reduce wealth inequality by ensuring the richest individuals contribute more to public finances. The revenue generated could be used to fund public services and social programmes.
• Cons for the Public:
  Critics argue that a wealth tax could discourage savings and investment, potentially harming the broader economy. Valuing assets accurately could be challenging, leading to disputes and administrative costs.

4. Reforming Capital Gains Tax

Another option could be increasing the rates or reducing the allowances for Capital Gains Tax (CGT), which is paid on the profit from selling assets such as property, shares, or valuable personal possessions. This is the most likely to be reformed, and analysts suggest that rates could be aligned to that of income tax.

• Pros for the Government:
  Raising CGT rates or lowering allowances could generate additional revenue without directly affecting the incomes of most working people. It could also help address perceived unfairness, where capital gains are taxed at lower rates than income.
• Cons for the Government:
  Higher CGT rates could discourage investment, particularly in property and stocks, potentially affecting the housing market and financial markets. It could also reduce incentives for entrepreneurship and innovation.
• Pros for the Public:
  A higher CGT rate could ensure that those with significant wealth pay a fairer share, especially those who profit from property and investments. This additional revenue could be directed toward public services and infrastructure.
• Cons for the Public:
  Higher CGT could discourage investment in assets such as property and shares, potentially impacting the returns for individual investors, pension funds, and those saving for retirement.

5. Increasing Fuel Duty

Fuel Duty is a tax levied on petrol, diesel, and other fuels used by vehicles on public roads. Increasing this duty could be another option for raising revenue.

• Pros for the Government:
  Raising Fuel Duty could generate substantial revenue relatively quickly due to the widespread use of vehicles. It can also align with the government’s environmental goals by discouraging excessive fuel consumption and promoting the use of greener alternatives.
• Cons for the Government:
  Increasing Fuel Duty can be politically contentious, as it directly impacts the cost of living, especially in rural areas where people rely more on vehicles due to limited public transport. It could also face opposition from industries heavily reliant on transport, such as logistics and farming.
• Pros for the Public:
  From an environmental perspective, higher Fuel Duty could encourage the use of public transport, cycling, and electric vehicles, contributing to reduced emissions and improved air quality.
• Cons for the Public:
  Higher fuel costs can disproportionately affect lower-income households and those in rural areas with limited transport alternatives. It may also increase the cost of goods and services, as businesses pass on the higher transport costs to consumers.

6. Reforming Inheritance Tax

Inheritance Tax (IHT) is currently charged at 40% on estates above a certain threshold (£325,000 in 2024). In reality, a married couple with a property who want to leave their estate to their children have a joint allowance of £1million.

Reforming IHT by reducing allowances or increasing rates could be another avenue Labour might explore.

• Pros for the Government:
  Increasing IHT rates or lowering thresholds could generate additional revenue, especially from wealthy estates. It also aligns with Labour’s agenda to reduce wealth inequality by ensuring those with larger estates contribute more to public finances.
• Cons for the Government:
  Inheritance Tax is often unpopular and viewed as a “death tax.” Higher rates or lower allowances could face strong opposition from those who believe it unfairly taxes individuals’ savings and assets that have already been taxed during their lifetime. It might also encourage the wealthy to seek tax planning strategies that reduce their liabilities, limiting the potential revenue gain.
• Pros for the Public:
  Reforming IHT could be seen as a way to promote fairness by ensuring that wealth is not concentrated in the hands of a few and is redistributed more equitably. The additional revenue could help fund public services such as healthcare and education.
• Cons for the Public:
  For middle-class families, an increased IHT burden could mean less inheritance for their children or beneficiaries. It could also lead to more complex estate planning requirements, potentially incurring additional legal and advisory costs.

7. Changes to Pension Tax Relief and Allowances

Labour could also consider reforming the tax relief on pension contributions or making changes to allowances such as the annual allowance or lifetime allowance. Here are some possible measures:

• Reducing Relief on Pension Contributions: Currently, pension contributions receive tax relief at an individual’s marginal rate of income tax. This means higher-rate and additional-rate taxpayers receive 40% or 45% relief, respectively. Reducing this relief to a flat rate (e.g., 20% or 25%) could be a significant revenue-raising measure.
• Removing the Pension Tax-Free Cash: Currently, individuals can withdraw up to 25% of their pension pot tax-free upon reaching retirement age. Labour could consider reducing or abolishing this tax-free allowance to increase tax revenues.
• Changing Pension Allowances: Labour could reduce the annual allowance (the amount you can contribute to your pension each year and still receive tax relief) or reintroduce the lifetime allowance (the maximum amount of pension savings you can accumulate without facing extra tax charges).
• Pros for the Government:
  Changes to pension tax relief and allowances could generate substantial revenue, particularly from higher earners who benefit the most from the current system. It would also align with Labour’s focus on addressing inequality by potentially redistributing wealth from those with larger pension pots.
• Cons for the Government:
  Reforming pension tax relief or allowances could discourage retirement savings, especially among higher earners. It might also face significant opposition from those nearing retirement, who may feel unfairly targeted by changes that affect their long-term financial planning. The move could be perceived as undermining the current incentives for saving for retirement, leading to a potential long-term increase in state support for pensioners.
• Pros for the Public:
  For lower earners, a flat rate of tax relief on pension contributions could increase their overall savings. Reducing the complexity of pension tax rules could also make pensions easier to understand and manage, potentially encouraging more people to save for retirement.
• Cons for the Public:
  Higher earners would face reduced benefits from pension savings, which could deter them from contributing to pensions at current levels. Removing or reducing the tax-free cash allowance would impact those who have planned their retirement around the ability to withdraw a lump sum tax-free, potentially affecting their standard of living in retirement. Changes to allowances could also catch those who have already saved substantial amounts off guard, leading to unexpected tax bills.

The Impact of Limited Tax-Raising Options

By ruling out increases in income tax, National Insurance, and VAT, Labour has limited its tax-raising options. While this decision protects the disposable income of working households and maintains consumer spending power, it also means the government must explore less conventional or more politically sensitive measures to fill the fiscal gap.

Labour’s strategy may require a combination of these potential tax changes to meet its revenue goals while adhering to its manifesto promises. Each option has its own set of challenges and implications, both for the government and for the public.

Conclusion

The upcoming Autumn Statement from Labour will provide more clarity on how they plan to address the fiscal black hole without raising income tax, National Insurance, or VAT. While this decision limits their options, a range of alternative tax measures is still on the table. As these developments unfold, it’s crucial for businesses, families, and individuals to understand the potential impacts on their finances and prepare accordingly.

At Mather & Murray Financial, we are here to help you navigate any changes that may arise from the Autumn Statement. Watch out for our Autumn Statement Update that we will publish the day after the announcements. Our team of experienced advisers, head quartered in Swindon, can provide tailored guidance to help you stay on track with your financial goals. Contact us today for a consultation and ensure your financial plans are prepared for the future. BOOK A CALL BACK here.