Tax changes with huge receipt potential

Will Drysdale, Senior Reporter, Business & Accountancy Daily

With speculation for tax changes at the Budget already running rife statistics show targeting the three main taxes with 1p rises could raise over £66bn.

HMRC has published its annual Direct Effects of Illustrative Tax Changes detailing what tax increases Rachel Reeves cold address at the Autumn Budget to cover the government’s spending costs and plug the remaining financial holes.

For example, changing the basic rate of income tax by 1p could generate £6.9bn in the first year of implementation, and by 2028/29 could generate £23bn in total.

However, as Labour has repeatedly promised to not increase taxes on working people it’s unlikely for this to happen, and more likely taxes paid by fewer people will be increased with many speculating capital gains tax could be targeted.

Sarah Coles, head of personal finance at Hargreaves Lansdown said: ‘The government is between a rock and a hard place for the autumn Budget. If they don’t get the growth they’re hoping for, in order to balance the books, they’re likely to have to cut spending and raise taxes.

‘They then need to decide whether to opt for a host of small tax rises, or to make changes to one of the big hitters - like income tax, National Insurance or VAT. Neither would be easier or popular, but these figures show just how much can be raised from a small change to a big tax.’

If Reeves decides to break Labour’s promise not to tax working people further, then employee National Insurance Contributions may seem like an easy option for her after Jeremy Hunt, former chancellor, reduced this twice before the Conservatives lost the election in July 2024.

Hunt reduced the basic rate of National Insurance from 12p to 8p over the course of a few months at the end of 2023 and the start of 2024.

A rise of just 1p here would add more than £5.3bn to the tax receipts in the first year, and more than £16bn over a three-year period. This, coupled with a 1p rise in income tax could generate almost £40bn over three years.

Coles added: ‘Raising taxes would also be problematic for the government. It’s one reason why they have repeatedly said there aren’t any current plans to raise tax in the autumn. However, if growth doesn’t close the funding gap it could force their hand.

‘They might opt to make a host of smaller changes, raising more modest chunks of tax with each one, but causing serious issues for anyone affected. The more changes they make, the more far-reaching these impacts become.

‘The Budget last year demonstrated the widespread dissatisfaction that can come from this approach.’

Another unpopular area that would generate billions is VAT, increasing this by just 1% has the potential to pull in £27.5bn. The sheer scale of this may persuade Reeves to target it could breach what trust the public has with the Labour party.

Coles said: ‘Politically, it would be incredibly difficult, because they pledged to leave these alone in their election manifesto and have repeatedly said they won’t raise taxes for working people.

‘In an environment where there are no great and popular choices, the government will need to find the least worst options, so we need to consider the potential impact of these changes.’

The date for the Autumn Budget is yet to be set but with public finances stretched Reeves will already be thinking about how the books can be balanced while keeping to their manifesto pledges.