Reeves needs to find £5bn. These are the tax rises she will target

Telegraph

26-05-2025

Last week was a costly one for the Chancellor. After the Prime Minister's U-turn on winter fuel payments and amid mounting speculation that the two-child benefit cap could be next, she is facing a £5bn black hole in the public finances.
With further welfare or spending cuts off the table, tax rises are inevitable. But which ones? Angela Rayner, the Deputy Prime Minister, has provided a starter for 10 in the memo sent by her department to the Chancellor and revealed by this paper. We looked at most of Rayner's suggestions when I was at the Treasury so I have a good idea what officials will be advising Reeves.
Increasing the bank surcharge, an additional tax on the profits of banks and building societies, is seen as relatively straightforward, and it was pointedly not included in the Government's promise to freeze corporation tax. The teams responsible for financial services inside the Treasury will be warning about the impact on the competitiveness of the banking sector and it would certainly run counter to the Government's growth narrative. But it would be popular with Labour MPs and the public at large, and is therefore easy to do.
The same could be said for the abolition of inheritance tax relief on AIM shares, a further reduction in the dividend allowance or an increase in dividend tax rates. These are straightforward tax changes, and aligning dividend rates with income tax rates and making AIM shares subject to inheritance tax would certainly be seen by many inside the Treasury as 'good tax policy'. But would the Chancellor really want to double down on the war she has started with investors and entrepreneurs?
The property tax suggestions in the Rayner memo were a collection of either small changes that wouldn't raise much, or wholesale interventions into stamp duty that would have knock-on implications for the property market. I suspect these were dismissed quite quickly.
Reintroducing the Pensions Lifetime Allowance on the other hand would certainly have got a warmer hearing from officials who were never that keen on Jeremy Hunt abolishing it in the first place. They weren't against raising the allowance, but had concerns about getting rid of it completely. So I wouldn't be surprised if work was underway to reintroduce an allowance of some sort. Whether they can do this without the senior doctors who benefited from its abolition striking over its reintroduction is another matter.
The final tax suggestion from the Deputy PM was to continue the income tax threshold freeze for additional rate payers. This alone wouldn't really raise much but the fact that Rayner's memo stated that such a freeze would be 'consistent with the manifesto' was alarming. It is clear that parts of the Government are prepared to argue that freezing thresholds doesn't amount to a breach of their commitment not to raise income tax rates.
If that's the case, and given that the Chancellor needs to raise £5bn to plug this black hole, she will have a straightforward political choice. She could announce a damaging set of banking, dividend and inheritance tax changes that would slow growth but close the gap. In doing so she would obviously face a justifiable backlash from the nation's wealth creators.
Instead, she could announce a continuation of all income tax and National Insurance threshold freezes, not just those for additional rate taxpayers. This would raise roughly what she needs. We would then be treated to a re-run of the ridiculous spectacle we saw last Autumn, where, having raised National Insurance, the Chancellor said with a straight face that she hadn't.
This time she would argue that the manifesto said Labour wouldn't increase income tax rates and ignore the previous sentence that said they wouldn't 'increase taxes on working people'. That is a hard sell. And a promise is broken.
As a result, if she only needs to find £5bn I think she'll opt for the hit on banks and entrepreneurs. At least that way she'll 'only' be breaking a relatively recent promise not to 'come back for more tax' from business rather than a manifesto pledge to the wider public.
The bad news for the Chancellor though is that having to find just £5bn in revenue is the best case scenario she will be facing in the Autumn. When you add in some or all of the £2bn a year needed for the recent public sector pay rises, a £5bn hit from the negative impact of US tariffs, a £7bn blow thanks to the OBR's treatment of a reduction in net migration and a downgrade in trend productivity growth worth anything up to £20bn a year, you can see why the Chancellor is in real fiscal and political trouble. And why Number 10 is likely thinking of changing the fiscal rules.
The Prime Minister's decisions on welfare means Rachel Reeves will have to break some of her promises. She will likely survive doing so if it is only her tax pledges that are broken. But if the situation leads Starmer down the irresponsible road of rewriting Reeves's'non-negotiable' fiscal rules I suspect he will need a new Chancellor. As I said at the start: quite a costly week.