Taxed into a corner - The Chancellor’s options in the upcoming Budget

What can we expect on tax in the upcoming Budget? How will the Chancellor navigate tax policies that may be economically sound but politically challenging? Do Labour’s manifesto commitments hasten the need to reconsider the ways we tax wealth? And what changes could create a tax system that is sustainable in the long-term, easing the strain on the public finances and boosting growth?

1. Taxed into a corner? The Chancellor’s options in the upcoming Budget Nick MacPherson, former Permanent Secretary to the Treasury Judith Freedman, Emeritus Professor of Taxation Law and Policy at the University of Oxford Adam Corlett, Principal Economist at the Resolution Foundation Mike Brewer, Interim Chief Executive at the Resolution Foundation (Chair) September 24 @resfoundation

2. There are many reasons to expect some tax policy changes So what may be in store? And what options would be best? 2 With 50 days until this Government’s first Budget... @resfoundation

3. 3 There are already tax rises on the way @resfoundation

4. VAT on private school fees (from 1 January) and removing business rates relief Strengthening the North Sea energy windfall tax Closing further non- dom tax loopholes A 1% Stamp Duty Land Tax rise for non-UK residents Changing the tax treatment of carried interest for (very high-earning) fund managers, who currently pay a 28% rate £6 billion a year from reducing the tax gap , aided by investment in HMRC 4 Some tax rises are already in store – £10bn in Lab manifesto @resfoundation

5. Most – particularly the big freezes – are unlikely to be changed But some looming tax rises in Spring 2025 will at least be discussed: End of temporary business rates cut for retail, hospitality and leisure End of temporary Stamp Duty cut, unless made permanent, costing £2bn End of temporary Fuel Duty cut, and annual uprating decisions 5 Some tax rises are already in store – £24bn of tax rises scheduled by the last government to kick in over 2025-2027 @resfoundation

6. 6 Real value of unleaded petrol Fuel Duty and average petrol pump price: UK Continued freeze would cost £5bn in 2028. Doing ‘only’ the 5p rise would still cost £2bn. Notes: CPI adjusted to July 2024 prices. Petrol price projection based only on the real price from 29 July 2024, plus projected changes in Fuel Duty (plus VAT). Source: DESNZ, Weekly road fuel prices; ONS, Consumer Price Index; OBR, Economic and Fiscal Outlook, March 2024; Bank of England, Monetary Policy Report, August 2024. @resfoundation Fuel Duty is due to rise by 5p+~1p in 2025, and further in future. Cancelling these rises should not be a priority

7. 7 New revenue is likely to be needed and – despite many red lines – there are still many good options @resfoundation

8. Pension pots should no longer be excluded Business Relief and Agricultural Relief could be restricted: Cap how much can go untaxed Introduce farmer and family business tests to target relief Increase minimum holding periods and cancel relief if sold soon after death But more radical reform would entirely abolish these and the complex Residence Nil Rate Band , while adding lower bands instead (e.g. 20% and 30%) 8 Broadening the Inheritance Tax base could raise £2 billion @resfoundation

9. Close off options for paying no CGT: end forgiveness at death , and introduce an exit charge where people move abroad And marginal rates should be aligned with those for employees / dividends to reduce distortions to how people take their money and unfairness across groups For shares, top CGT rate would rise from 20% to 39.35%, matching dividends The top rate for other assets should be higher But exempt inflationary gains from tax, so ~2% return per year is tax-free – limiting distortions re. when people spend their money 9 CGT and related reform could plausibly raise £12 billion @resfoundation

10. Pension tax reliefs are expensive and often inconsistent Extending 13.8% employer NI to employer pension contributions could raise £12 billion (after reimbursing public employers) At the same time, remove employee NI from worker pension contributions , costing £3 billion but aligning the treatment of employee & employer contributions – with most auto-enrolled workers better off 10 Pension NI relief changes could raise £9 billion a year @resfoundation

11. 11 Conclusion @resfoundation

12. A reduced tax gap and fewer fiscal forecast fictions would be praiseworthy Despite the red lines, over £20 billion extra could be raised Led by CGT etc. (£12 billion) and pension contribution NI changes (up to £9 billion), with some from IHT (£2 billion) Focused on “those with the broadest shoulders” And net of some tax cuts These options would all make the tax system more efficient Additionally, the Chancellor could further rack up a reforming record by getting the ball rolling on: Replacing business rates Rebalancing council funding through a Fair Funding Review Exploring options for the future of motoring taxes 12 There is a lot of potential for sensible tax reform @resfoundation

13. Threshold was raised in 2022 from £125,000 to £250,000 Will expire on 31 March 2025, adding £6,250 to the cost of moving for many Should expect transaction timings to be distorted over the next year But Stamp Duty is relatively economically damaging, and we need our housing stock to be used efficiently Even in tight circumstances, £1.8bn should be found to cancel the rise Cost could potentially be reduced by excluding additional properties etc. 13 In contrast, the upcoming Stamp Duty rise should be cancelled @resfoundation