​Reeves rules out raids on the big three taxes. Here's what she could target instead

Telegraph

14 hours ago

Rachel Reeves has tied her own hands. She has repeatedly denied that she will raise income tax, National Insurance or VAT at her next Budget.
At a speech on June 4 ahead of the announcement of her much-anticipated spending review, the Chancellor said the manifesto promises were 'fully funded, fully costed'.
She added: 'We can deliver on our manifesto commitments, including not increasing the taxes that working people pay, the key taxes that working people pay, income tax, National Insurance and VAT.
'The commitments that we made in the manifesto not to increase the key taxes that working people pay … are promises that we stand by.'
But with worrying new reports about the economy emerging seemingly weekly, and with the Organisation for Economic Co-operation and Development (OECD) saying 'momentum is weakening', Reeves's room for manoeuvre is disappearing.
There is a growing consensus that taxes will be raised yet again in the autumn Budget as the Chancellor battles low growth and higher defence spending while being restricted in how much she can borrow.
Tim Stovold, of accountancy firm Moore Kingston Smith, said the manifesto commitment not to increase the rates of income tax, National Insurance and VAT had 'deprived the Chancellor of the levers that could normally be pulled to collect more tax'.
Now that Reeves has ruled out raising the three main contributors to the Treasury's coffers, where will her axe fall?
Angela Rayner, the Deputy Prime Minister, made a series of suggestions in a leaked memo, including reinstating the pensions lifetime allowance and removing more inheritance tax reliefs, which were calculated to raise approximately £3bn in total.
Bringing back a limit on lifetime pension savings would be devastating to the finances of middle Britain and, if applied to public sector workers, seems destined to exacerbate the NHS staffing crisis. Telegraph Money campaigned for years to scrap the tax, which was leading to the early retirement of the most senior medical staff.
Labour policies have already triggered a fall in capital gains tax receipts and an exodus of the wealthy.
Economic forecasting group, the EY Item Club, has warned the country may require a 'fiscal policy rethink' after it downgraded growth expectations for 2025 and 2026.
Here, Telegraph Money outlines the different ways the Chancellor could raise tax on income in this year's Budget.
Extending the freeze on thresholds
Since Rishi Sunak froze income tax thresholds in 2021, government revenue from this 'stealth tax' has soared 36pc to hit £301bn a year.
The latest forecasts suggest eight million workers will be pulled into higher rates of tax by 2028, raising an extra £38bn per year for the Treasury.
In the 2024 Budget, Reeves vowed to bring an end to the stealth tax raid, adding that personal tax thresholds will be uprated in line with inflation once again. She said at the time: 'I am keeping every single promise on tax that I made in our manifesto.'
But it is now thought she may decide to change course because of low growth, high borrowing costs and the threat of a trade war.
The Finance Act 2025 extended the freeze on inheritance tax thresholds until 2030 – and the Chancellor will be under pressure to do the same to other allowances and thresholds, too.
Sean McCann, of financial advice firm NFU Mutual, said: 'Extending the freeze on income tax thresholds and allowances has been the favoured method of increasing tax take without raising rates. As incomes increase, more people are dragged into higher tax bands.
'Current thresholds are set to remain frozen until 2028. It's likely we'll see this date extended to at least 2030 to ease the pressure on government finances.'
Inheritance tax
From April 2027, unspent pensions will be brought within the scope of inheritance tax and from next year the exemption for shares listed on London's junior stock market will be halved. Angela Rayner's memo suggested going further and removing the inheritance tax break afforded 'unlisted' shares, those privately held and not available to buy on an exchange.
The Government could also raise the rate of inheritance tax or cut the threshold if it wanted to be bolder, though this would be highly controversial. While the majority of estates do not attract death duties, many people are opposed to inheritance tax even if it doesn't affect them personally.
National Insurance
In the biggest revenue-raiser of her first Budget, Reeves increased the National Insurance rate paid by employers.
Raising the rate that employees pay could raise huge sums but would be a clear break of a manifesto pledge. However, Labour could change the thresholds that determine what rate of National Insurance applies without changing the rate itself.
Reducing the entry threshold by £2 a week would bring lower earners into the tax net, for instance, and would raise £650m over the next three years.
Shaun Moore, of wealth manager Quilter, said this could be a politically insensitive move 'as it would disproportionately affect lower-income groups who are already feeling the effects of inflation'.
The Chancellor could increase the upper earnings limit for higher rate taxpayers so that more of their income attracts the 8pc rate as opposed to the reduced 2pc rate.
Mr Moore said: 'Currently, higher earners benefit from a significant drop in their marginal NI rate once they pass the upper earnings limit. Removing or reducing this discount would raise substantial sums from high earners but could be criticised as a disincentive to high earners.'
Increasing the upper earnings limit by £10 a week could rake in £660m more over the next three years, according to HMRC's calculations.
National Insurance on pensions
If the Chancellor wanted to avoid being seen to explicitly increase tax, she could broaden the scope of National Insurance itself.
Mr McCann said: 'Currently, employers don't pay National Insurance on money they pay into their employee's pensions. HMRC estimates the cost of this to be £23.8bn a year.
'Levying employers' National Insurance at 5pc on money they pay into their employees' pension would raise significant revenue without explicitly breaking manifesto commitments.'
The Chancellor increased the rate of employers' National Insurance from 13.5pc to 15pc in the last Budget.
Mr McCann added: 'As an additional measure, the Chancellor could seek to levy employee's National Insurance on those over state pension age, who currently escape the charge on their earnings.'
Capital gains and dividend tax
Both these taxes are clearly under threat given they aren't typically paid by ordinary workers.
It was feared at last year's Budget that Reeves would equalise capital gains tax rates to income tax, in order to treat so-called 'unearned' income the same as earnings. Removing this perceived unfairness has long been an aim of Labour politicians.
But the Chancellor held back from introducing the top rate of income tax, 45pc, to capital gains. Instead, she increased the rates of capital gains for shares and other assets, bringing them into line with the rates on sales of residential property.
At the time this was forecast by the OBR to raise an extra £2.8bn a year.
Reeves could increase capital gains rates further – perhaps bringing them in line with dividend taxes (more on this below) – or slash the £3,000 annual tax-free allowance. This fell from £12,300 in 2022-23 to £6,000 in 2023-24 before it was halved again.
Last year, the Left-leaning think-tank the Resolution Foundation proposed aligning capital gains rates for shares with dividend tax rates, taxing property gains like wages, and introducing exit charges when taxpayers leave the UK.
These would be drastic reforms, which the think-tank said could raise as much as £12bn.
Further changes to dividends tax could also be on the Chancellor's mind.
The annual tax-free allowance was halved from £1,000 to £500 in April 2024, under former chancellor Jeremy Hunt. Those receiving payouts over £500 then pay 8.75pc, 33.75pc or 39.35pc, depending on their income tax band.
These rates could be aligned with income tax rates, which are slightly higher.
Due to cuts to the tax-free allowance, an additional-rate taxpayer now pays an extra £1,770 in tax on the first £5,000 of dividend income compared to seven years ago, according to analysis by Growth Capital Ventures.
A Treasury spokesman said: 'As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy – which is our focus. Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms which are expected to grow the economy by £6.8bn and cut borrowing by £3.4bn.
'We are committed to keeping taxes for working people as low as possible, which is why at last autumn's Budget we protected working people's payslips and kept our promise to not raise the basic, higher or additional rates of income tax, employee National Insurance or VAT.'