Inheritance Tax, Capital Gains Tax And Employer National Insurance Reforms Pass Triple Tax Test And Raise Over £20 Billion Towards Avoiding Damaging Cuts To Public Services

10th September 2024

Reforms to Inheritance Tax (IHT), Capital Gains Tax (CGT) and employer National Insurance (NI) could raise over £20 billion a year, and still pass a 'Triple tax test' of improving tax efficiency. This ensures that tax rises fall on those with the broadest shoulders and not break manifesto commitments, according to new Resolution Foundation research published today Tuesday 10 September 2024.

Amid widespread speculation of over what Chancellor Rachel Reeves may announce in her crucial first Budget, Revenue and Reform notes that tax rises are a dead cert and a time-honoured tradition - since the 1990s, taxes have gone up by an average of £21 billion over the first two fiscal events after an election.

Taxes are going up because, irrespective of new tax rises, the Chancellor has inherited £24 billion of tax rises already announced by her predecessor Jeremy Hunt and given no indication that they will be reversed. However, while the scheduled rises in Fuel Duty - on track to exceed 6p per litre in 2025 - should remain in place, the report calls for the damaging rise in Stamp Duty next April to be cancelled so as to boost mobility, at a cost of £1.8 billion.

The £10 billion of tax rises in the Labour manifesto are also likely to be confirmed. However, with these notionally earmarked to spending commitments, additional tax rises will be needed as the Chancellor confronts both a £22 billion departmental overspend this year - much of which will roll into future years - and inherited plans to cut funding to unprotected public services by £19 billion, and with very little wriggle room against her fiscal rule of getting debt falling.

Furthermore, the Chancellor has greatly limited her revenue raising options by pledging not to raise the main rates of Income Tax, Corporation Tax, VAT or National Insurance. In spite of this self-imposed constraint, the report shows how it is possible to raise around £20 billion a year, and improve the efficiency of the tax system in the process.

Capital Gains Tax is ripe for reform, says the Foundation, as rates are unjustifiably lower compared to those on other forms of income. For example, employment income faces a top rate of tax of 53 per cent on their earnings, but some capital gains face a top tax rate of only 20 per cent.

To address this, the Foundation proposes aligning CGT rates for shares with dividend tax rates, taxing property capital gains like wages, introducing CGT exit charges when moving country, and applying it at death. Dividend and rental income tax rates should also be reformed. But these changes should be balanced with the reintroduction of inflation-indexing so as to create a tax-free rate of return which would particularly benefit long-term investments. Together this package of reform could raise anything up to £12 billion.

The report notes that while there are many ways in which the taxation of pensions is inconsistent and unfair, the Chancellor's best option would be to levy employer NI on employers' pension contributions. Doing this at the same time as abolishing NI on employees' pension contributions would leave a typical worker saving via auto-enrolment better off, while still raising £9 billion overall, and would level out current arbitrary tax biases between different workers’ savings.

The Chancellor should also close loopholes in IHT that allow the very wealthy to avoid paying their fair share, and undermine public trust in the tax. Ending Business and Agricultural reliefs and bringing pension pots into IHT would raise £2 billion.

The Foundation adds that as well as introducing these tax measures immediately, the Government should get the ball rolling on important longer-term tax reforms to Business Rates (as promised in the manifesto), Council Tax and road pricing.

As more people switch to using Electric Vehicles (EV), the Government can ill-afford to delay introducing a new motoring tax for EVs and civil servants should now be exploring the pros and cons of every option. The current system, which vastly favours those who can afford an EV, is set to drive a £17 billion hole in the public finances by 2033-34 as EV take-up rises. This highlights the need to move to a system where all vehicles pay for road usage, says the report.

Adam Corlett, Principal Economist at the Resolution Foundation, said, "There is widespread speculation about what might be in the first Budget of the new Parliament, but overall tax rises are a dead cert and time-honoured tradition. The Labour manifesto included £10 billion of tax rises, but fresh ones will be needed in order for Rachel Reeves to sufficiently fund public services and investment while still hitting her fiscal rules.

"The Chancellor’s self-imposed constraints on not raising Income Tax, VAT, National Insurance or Corporation Tax don’t leave her much room for manoeuvre if she doesn’t want to break manifesto commitments. But there are still several areas of tax she should focus on.

"Long overdue reforms to Inheritance Tax, Capital Gains Tax and pension contribution reliefs would fit the bill and could raise over £20 billion if needed, while also making the tax system fairer and more consistent between different taxpayers."