Amid all the expectations ahead of Andy Burnham taking over as PM in the coming days, there are big questions about tax – and who might end up better or worse off under his premiership.
He takes over from Sir Keir Starmer with the UK economy having grown faster than any other G7 country in the first three months of this year. up 0.6%. However, it then dropped 0.1% in April before eking out growth of the same scale in May.
Meanwhile, the government borrowing continues to rise – along with eye-watering interest bills – and the nation’s public sector debt mountain edges towards the £3trillion mark.
Mr Burnham has suggested he will stick to Labour’s manifesto pledge not to increase income tax, VAT or national insurance. However, they account for around two thirds of all tax receipts, leaving him and his Chancellor somewhat boxed in when it comes to what levers they can pull. We might have to wait for for the autumn Budget for the nitty gritty but what are the options that might be on the cards?
Business rates
One tax Mr Burnham seems passionate about changing is business rates. In a recent interview with LBC, he suggested the property tax on warehouses could be increased to fund tax cuts for pubs and some high-street businesses. His pledged shake-up formed part of his successful by-election campaign to become the MP for Makerfield.
He said pubs, clubs and music venues would get a 20% cut, while smaller, independent hospitality, leisure and retail companies would see the threshold for paying business rates raised for the first time since 2017. The cut would be paid for by higher rates on giant warehouses operated by online firms such as Amazon, and targeting the owners of empty high street properties.
Income tax
While upping income tax maybe off the cards, there is likely to be focus on the thresholds at which people start paying tax, and then the upped bands.
Freezing the thresholds has meant workers and others being stung as their income rise. However, it raked in tens of billions for the Treasury. Rachel Reeves extended the freeze to April 2031, and doing so until 2032 could rake in an extra £5billion. However, Mr Burnham criticised the freeze, highlighting it draws pensioners into the tax net. On the BBC’s Question Time on June 4, he said: “On the personal allowance, I’ve heard on so many doorsteps, and I’ve said to my team, let’s have a proper look at this and let’s develop a policy.”
Among the hot potatoes for any government is “triple lock” pension pledge. This promises that the state pension will rise each April by inflation, average earnings or 2.5% – whichever is highest. It is costly, but those in power have shied away from watering it down for fear of the backlash.
Mr Burnham appeared to commit to keeping it when answering questions recently on social media site Reddit. “I appreciate there’s a lot of debate about this but it is important that the commitment in the manifesto stands,” he said. He could look at pension contributions, which are fully tax deductible, especially for higher earners.
Capital gains tax
Capital gains tax (CGT) is levied on profits made from the sale of assets, and generated an estimated £20.3billion in the last financial year. For basic rate taxpayers, it is 18%, and 24% for higher and additional tax bands.
Wes Streeting, the former health secretary who at one stage was tipped as a possible Chancellor, called for CGT to be raised to the same level as income tax. Dan Neidle, of the Tax Policy Associates think tank, urged Mr Burnham to go one step further: “Pairing CGT reform with an income tax cut could be extremely shrewd – both politically and economically.”
Wealth tax
Those calling for a wealth tax have been encouraged by signals coming from Mr Burnham of late. In an interview with former footballer and Match of the Day presenter Gary Lineker, he refused to rule it out, suggesting his incoming government may have “to ask for a little more” tax at some point. But he also added that he wanted to focus on “bringing people together” rather than creating “new divisions”.
However, just how a wealth tax would work in practice, and how successful it would be in raking in money from the rich is up for debate. Expect lots more pressure on Mr Burnham and his Chancellor to back such a tax, but given the complexity it may not end up being a priority.
Property tax
Successive governments have dodged overhauling the country’s property tax for good reason, given the complexity. However, most economists and other experts are united in agreement that it is in need of radical reform.
The current council tax system, for example. is seen as deeply flawed, and can mean someone living in a £150,000 terraced house in Middlesborough pays the same as the wealthy owner of a £250million in London’s Westminster. PM-in-waiting Mr Burnham said last month he was “personally keen to see reform of council tax”.
Stamp duty – usually paid when buying a property or a piece of land – is also universally slammed for being a drag on the property, even though it’s a money spinner for the Treasury.
The group Fairer Share, and others, argue council tax and stamp should be scrapped and replaced with what is known as a proportional property tax set at 0.48% of a property’s value, or 0.96% for second homes, empty properties and those owned by foreign buyers.
Mr Burnham told The Telegraph in May he had “long been persuaded of the argument” for a land tax to replace both council tax and stamp duty.
Any such shake-up would likely hammer home owners in London and the south east, but benefit far more elsewhere. Mr Burnham could alternatively consider adding a band to the eight already for council tax to rake in more from those who own the priciest homes. However, any shake-up could take years to implement.
Bank tax
Britain’s big banks have reported bumper profits, leading to growing calls for them to hit with heavier taxes.
Lenders pay corporation tax, then an additional surcharge on their banking profits. The surcharge was originally 8%, before the Tories cut it to 3% in 2023.
The TUC is calling for an increase in the bank surcharge tax to deliver a permanent social tariff to cut energy bills to all those on low and middle incomes by up to £559 a year.
But Dan Neidle warned it would be “both unprincipled and a dangerous mistake.” He added: “A return to the old 8% surcharge would mean banks paying a 33% headline corporation tax rate on profits. That would create a significant competitiveness problem for London versus other financial centres.” Another option could be to stop the Bank of England paying interest to on the reserves lenders hold with it.
Tax gap
For all the taxes HMRC collects, there is a colossal £59billion it doesn’t. The so-called “tax gap” is how much the taxman thinks should have paid for wasn’t, for a whole of reasons. The overall tax shortfall among individuals and firms rose to more than £59billion in the last financial year, equating to 6.4% of all the taxes due. To put the number into perspective, the tax it lost out on was almost was much as the £60billion the government spent on defence last year.
The country’s wealthiest individuals failed to pay £3.6billion that was owed in the last financial year – more than the shortfall for all other individuals taxpayers combined.
For individuals and companies in general, it ranges from mistakes in calculating the amount of tax owed and avoidance contrary to the rules allowed, through to tax evasion, which is illegal, and criminal attempts to defraud the tax system.
Small businesses account for more than 60% of all the missing money owed to the taxman. Cracking down on the problem would prove lucrative for the Treasury but is complex and would take time.
