John Healey will deliver his first Budget as chancellor next week, with speculation mounting about the changes he and Andy Burnham will make at the major fiscal event.
The new prime minister has pledged to tackle the cost of living as one of his main priorities in the role, but economic uncertainty caused largely by events overseas has undoubtedly made the task more difficult.
Mr Burnham has admitted that the upcoming Budget will be “challenging” after official figures revealed inflation reached a five-month high in August.
Paired with soaring borrowing costs, experts are now forecasting a combination of tax rises and spending cuts at the event.
As prime minister, Mr Burnham has committed to Labour’s 2024 manifesto pledge not to increase the headline rate of income tax, VAT or national insurance contributions.
However, this still leaves him and the Treasury with a lot of options to boost government coffers. Given the new prime minister’s focus on devolution and progressive growth, any tax changes are also likely to focus most on higher earners.
In the build up to the event, Mr Healey has denied that he is planning to raise Capital Gains Tax (CGT) rates to match income tax. The levy is paid on gains from the sale of assets like shares and commercial property.
Here are some of the other key options the government is understood to be considering:
Unfreezing income tax thresholds
Since 2021, the income tax personal allowance has been frozen at £12,570. This is the amount that can be paid before income tax deductions begin. The measure has been criticised as a way for the Treasury to boost revenue from income tax without increasing its rates.
Former chancellor Rachel Reeves announced an extension to the freeze on income tax thresholds at last year’s Budget, moving its end date from 2028 to 2031.
This has created what economists have termed “fiscal drag”, where more people are pulled into paying tax, or into higher brackets, as average earnings increase but thresholds stay the same. The measure is expected to raise £8bn for the Treasury in 2029-2030, according to Office for Budget Responsibility (OBR) analysis.
Mr Burnham’s government has pushed back against reports suggesting it is considering relinking the income tax thresholds to inflation.
However, the new prime minister previously told reporters the issue was “the thing I heard the most on the doorsteps”, adding that it has become “lodged in my mind”.
If he were to take action on it, his first Budget in power may be the time to do so.
Inheritance tax changes
Speculation grew after Mr Burnham took over as prime minister that he may revisit plans he drafted as health secretary under Gordon Brown in 2009 to radically overhaul inheritance tax.
Under those plans, inheritance tax would have been scrapped in favour of a 10 per cent levy on all estates upon death to fund an NHS-style social care service.
The new government has distanced itself from the idea, telling reporters that Mr Burnham’s plans for social care won’t rest on not imposing “one particular solution or tax”.
Another change reportedly under consideration is instead tightening existing inheritance tax loopholes to boost Treasury coffers.
This could include ending the reset on capital gains tax liability on inherited assets, or extending the seven-year rule for tax-free gifts to a decade. Both would follow the decision by Ms Reeves in 2024 to bring pension pots into the scope of inheritance tax – set to become law next year.
Reforming property taxes
Another idea supported by Mr Burnham during his previous stint in Westminster was a land value tax, a replacement for stamp duty that would see a new levy charged based on land value.
The new prime minister has also previously been critical of council tax, calling it “highly regressive” earlier this year. The outdated banding system based on valuations last carried out in 1991 means that a Band H property in Blackpool can pay nearly £600 more than a £10m property in Mayfair.
While the government has pushed back on speculation that it will introduce a land value tax this year, it remains possible that a new way of taxing property may be announced.
More energy bill support
Although policy tweaks by Mr Burnham and his predecessor Keir Starmer have cut a collective £195 from the average energy bill, rising costs threaten to virtually wipe out these savings.
The situation has prompted calls for more government support to bring down bills, especially for households which are struggling the most.
To deliver on this, Mr Healey is reportedly considering a £1bn expansion of the existing Warm Home Discount, which currently grants a yearly £150 rebate to energy bills for households receiving a qualifying means-tested benefit. The move would add an extra £100 to the discount.
Bank taxes
Another option reportedly under consideration by ministers is reversing former Conservative chancellor Jeremy Hunt’s reduction of the surcharge banks pay on their profits.
Announced in 2023, the measure reduced the extra levy banks pay on top of corporation tax from 8 per cent to 3 per cent. Corporation tax was raised from 19 per cent to 25 per cent at the same time.
A reversal of the surcharge reduction has been backed by trade unions, who point out that the biggest four banks collectively made a profit of around £15bn in the first six months of the year.
However, UK Finance, the trade body for the banking sector, has said that such a move would “weaken competitiveness, discourage investment and job creation, and work against the government's ambition to deliver growth in every postcode”.
Online retailer crackdown
Mr Healey is understood to be considering a £1bn crackdown on online retailers at the Budget, hitting businesses like Amazon and eBay.
The policy would target online retailers by closing a loophole that often allows overseas sellers to avoid VAT, according to reports in The Times.
A Treasury source told the paper that the chancellor’s aim is to “protect local family businesses and the high streets we love”.
The government has not yet given any strong indication of the taxation policies it is leaning towards, with the Treasury’s longstanding position remaining to never comment on Budget speculation.
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