Which tax rises could Rachel Reeves introduce to pay for the £5bn welfare U-turn?

Independent

6 hours ago

This week's embarrassing climbdown on welfare saw the government's benefits reforms gutted almost entirely, while savings from the bill were slashed from £5bn to nothing.
In the wake of the U-turn, there are now growing questions over how the government will raise the money to fill the black hole in the public finances.
Ministers have already squeezed significant savings out of their departments in cuts that were unveiled at last month's spending review, meaning there is now a mounting expectation that the chancellor will be forced to raise taxes instead.
But Labour's manifesto pledge not to raise taxes on 'working people' leaves the chancellor with a limited number of workable options. A few possibilities were floated by deputy prime minister Angela Rayner in a leaked memo to Rachel Reeves ahead of the spring statement, which saw her urge the chancellor to raise taxes - suggestions which were ignored. But perhaps this week's welfare climbdown will leave the chancellor with no option but to look again at Rayner's suggestions.
Here, The Independent takes a look at a number of tax rises that the government could rely on to raise funds and balance the books.
Tax threshold freezes
The Treasury's most likely move would be to extend the freeze on income tax thresholds. This means that as wages rise with inflation, over the years workers are dragged into higher tax bands and end up paying more.
A freeze on the threshold at which the higher 45 per cent tax rate is paid was one of the options suggested by Ms Rayner in her leaked memo. But there is growing speculation the government could extend the freeze across all tax brackets.
It's a stealth tax, the impacts of which are not felt immediately, meaning it is normally better received among the general public compared with a direct hit to businesses or pay slips. But, if the freeze were extended to the end of the parliament, it could also bring in billions for the Treasury as earnings rise.
The freeze, which is already planned to last until 2028, is expected to drag around two million workers into higher tax bands.
Wealth tax
There have been calls from Labour MPs on the left of the party to introduce a wealth tax, calls which have only grown in the wake of Tuesday's welfare climbdown. Rachael Maskell, the architect of the rebellion which forced the government into shelving key pillars of the bill, demanded the government increase taxes on the very richest to pay for the £5bn climbdown.
Polling conducted by YouGov on behalf of Oxfam on the eve of the spring statement found more than three-quarters of people (77 per cent) would rather the government increase taxes on the very richest to improve public finances than see cuts to public spending. However, such a tax - which could look like a 2 per cent tax on net assets worth more than £10m - is thought to be very hard to implement, and could also lead to some of Britain's highest earners leaving the country.
Pensions
Ms Rayner also called for the lifetime pensions allowance to be reinstated. The allowance, which puts a cap on how much savers can put into their pension pot before a higher rate of tax is applied, was axed by the Tories. Labour had initially planned to reinstate the cap, but the plans were abandoned ahead of the election.
However, amid the controversy over cutting winter fuel payments – and then later reversing the decision – the government may be hesitant to introduce any other policies which would upset pensioners.
Corporation tax
The chancellor could also look at increasing corporation tax for banks – one of the suggestions included in the deputy prime minister's memo.
Politically, its fairly easy to tax banks as there is limited direct impact on voters. But it's important to note that banks in the UK are already highly taxed. They pay normal corporation tax of 25 per cent, plus a bank surcharge of 3 per cent. On top of this, they pay a bank levy of 0.1 per cent of their balance sheets.
Dividends
The deputy prime minister also proposed raising tax rates on dividends - a portion of a company's earnings received by a shareholder - for higher earners.
Currently, tax is not paid on dividend income that falls within your income tax Personal Allowance. There is also a £500 dividend allowance each year, meaning individuals only pay tax on any dividend income above this. Removing it altogether would be worth £325 million a year, HMRC data indicates.
However, there are concerns that raising dividend tax rates could discourage people from investing in companies – which is likely to have a net negative impact on the economy.
Ms Rayner also suggested ending inheritance tax relief on shares listed on the smaller Aim stock market. The Aim stock market is a sub-market of the London Stock Exchange. From April 2026, qualifying Aim shares held at the time of death will be eligible for 50 per cent relief from inheritance tax - but Ms Rayner has suggested ending this entirely.
While these changes might make businesses uncomfortable, they're actually unlikely to raise much money for the Treasury – meaning it's a less likely option for the chancellor.