Will Labour tax my pension, my home and my savings?

Prime Minister Sir Keir Starmer has told us things will get worse before they get better. Chancellor Rachel Reeves Chancellor has primed us to expect some tax rises in her first Budget on 30 October, as the government seek to fill a £22bn “black hole” it claims to have found in the country’s accounts.

Labour has already ruled out increases in Income Tax, Value-Added Tax (VAT) and National Insurance contributions. This places the possible burden of the tax rises on savings, pensions and homes.

As a result, we have seen speculation about a wide range of possible changes:

1. Higher Capital Gains Tax

The government could:

• Remove the remaining tax-free allowance om Capital Gains Tax (CGT).
• Charge gains at your marginal income tax rate rather than at a lower rate.
• Consider charges on unrealised gains, as the Democratic Party has proposed in the US for very wealthy people with assets over $100m whose overall tax rate is judged to be below 25%.

It has already ruled out levying Capital Gains Tax on someone’s main or sole residence.

2. Pensions

The government could:

• Remove the 25% tax-free allowance when taking money out of your pension pot on retirement.
• Limit the amount of money you could save each year through a pension fund.
• Limit the tax relief on contributions to the standard rate of income tax.
• Reimpose a lifetime total on tax-privileged pension saving.
• Remove Inheritance Tax relief from pensions savings that survive you.

3. Homes

The government could:

• Raise Stamp Duty Land Tax on more expensive and second homes.
• Remove the single-person deduction on Council Tax.
• Impose a new higher band of Council Tax on more expensive properties.
• Increase taxation on landlords renting out residential accommodation by reducing allowances against profits further or by increasing licencing fees.

4. Private equity

The government could tighten the rules on the taxation of so-called carried interest, making it always taxable at Income Tax rates rather than CGT. This is the proportion of profits accruing above a reference level to the manager. It is reviewing the general taxation treatment of private equity.

5. Oil and gas investment

The government has announced an increase in windfall taxes on the energy sector and the end of new exploration licences.

Wealth tax

The government could introduce an annual levy on someone’s total wealth. See more on the potential wealth tax here.

6. State Pension

• Savers could see their state pension become eligible for Income Tax, as it increases due to the annual uprating as income-tax thresholds are held down.
• Pensioners not on Pensioner Credit will lose their winter-fuel allowance immediately.

7. Private school fees

The government plans to levy 20% VAT on school fees from the beginning of 2025.

Reaction so far

Lobby groups are now setting out problems they see with some of the potential tax rises.

The government is unlikely to implement all or most of the above, but it has have not ruled out any of these changes and is allowing speculation and debate to swirl around these ideas. The open format of the debate means interest groups and affected parties can lobby the government ahead of the final decisions are made and announced.

The main lines of response to these varied tax change possibilities have so far included:

1. Oil and gas taxes

Industry group Offshore Energies UK has lobbied strongly against further tax rises on the energy sector. If the government goes ahead with its addition to the windfall taxes alongside already-introduced bans on new activity, it predicts a steep fall in investment in the North Sea. It forecast this will reduce it by more than £10bn a year over five years.

The lobby group said there are a potential 35,000 jobs put at risk by the measures. It points out that the North Sea oil and gas industry has paid corporation taxes three times the rate of any other business sector for the last two years but could end up paying less in total if the rapid rundown of the sector goes ahead.

2. Property taxes

There have been warnings from landlord groups and from homeowners that further increases in tax on private renting and on purchase of a property could add to the scarcity of properties to rent. Extra taxes could increase the costs of both renting and homebuying. There have already been landlords leaving the sector following the previous government’s toughening of regulation and tax on landlords.

3. Capital gains and wealth taxes

Tax and accountancy advisers have set out how progressive increases in tax on non-doms has led to wealthy people leaving the country to go to lower-tax jurisdictions. They argue that some moderately wealthy people might leave if the package of capital gains, pensions and other savings taxes becomes less attractive. Other countries are keen to attract better-off people by offering lower tax options.

Read more: What is Capital Gains Tax?

The Laffer effect

Some economists and tax advisers argue that lowering rates can lead to an increase in revenue if you cut the rates on taxes that people can legally avoid, or taxes that rich people move away to escape. They point out that, for example, when the UK government cut the top rate on earned income from 83% to 60% as well as cutting the standard rate from 33% to 30% in the 1979 budget, the amount of revenue collected rose well.

More people stayed or returned to the UK in the upper income brackets. The high rate in the 1970s had caused something then called the ‘brain drain’ where higher-earning people moved abroad. The state saw the proportion of tax on income and wealth to gross domestic product (GDP) rise from 10.87% in 1979 to 12.1% in 1984.

There is a danger in raising transaction taxes such as CGT and Stamp Duty that people avoid transactions to save tax. It is true that, in recent years, the government has collected more Stamp Duty Land Tax whilst putting the rates on more expensive properties up – but it is also true that property price inflation was the main driver of the extra revenue. Some argue that higher taxes can curb growth and reduce investor confidence and appetite for taking risks.

How fair is taxation?

Inequality is a concern and people have differing views on how much this should lead to higher taxes on the better off. The UK system of income and wealth taxation is progressive.

The top 1% of income earners in 2020/21 paid 29.1% of the total tax on 12.5% of their income. The top 10% paid more than half the income tax on one third of the income. (Source: House of Commons Tax publication, 10 May 2024.)

There has been a substantial rise in revenue from taxes on wealth, with CGT up 85% between 2023 and 2019 and Stamp Duty Land Tax up 27% over the same period. VAT is not charged on basics and brings in substantial revenue from luxury purchases but is a less progressive tax than Income Tax.

If you're interested in how some of these tax policies have changed over the years, explore our series on:

• The history of Inheritance Tax
• The history of Capital Gains Tax
• The history of the State Pension

There is enough time before the budget on 30 October for people to consider these possible tax rises and to engage in the debate about their suitability. It is too early to say which, if any, of these measures will be adopted by the government, but it is likely it will target people relying on rental and dividend income and on capital gains on savings rather than work income.

It is true that the government needs to raise more tax from people who have more money. The government will also wish to take income inequality into account. It also needs, however, to remember its prime aim is faster economic growth. As the government rightly says, faster growth will bring in more tax revenue without putting tax rates up. If it puts up the wrong taxes, rich people leave could the country and could deter people from investing in rented homes, interesting businesses and other job-creating measures.