Rachel Reeves has been warned against a tax raid on pensions and levying an annual wealth tax, as the chancellor weighs up options to fill a black hole of at least £30bn at the upcoming budget.
The Institute for Fiscal Studies (IFS) warned that restricting income tax relief on pension contributions “should be avoided” and repeated its cautions against an annual wealth tax, which it says would penalise savers, or increasing stamp duty.
Instead, they said the chancellor could raise tens of billions from tax reforms without breaking Labour’s manifesto pledges - but urged her to avoid “half-baked fixes” to Britain’s economic woes at the Budget.
They also said a windfall tax on existing wealth, conducted through an “unexpected and credibly one-off assessment” of wealth, could be an economically efficient way to raise revenue, as it would be unlikely to change people’s future behaviour.
It comes after reports the government is considering a tax raid on wealthier individuals in order to balance the books at November’s budget, amid warnings of a black hole estimated to be between £30 and £50 billion in the public finances as a result of sluggish productivity, U-turns and higher than expected interest payments.
In a wide-ranging report, the IFS urged the chancellor to resist “simply hiking rates” without making other changes to an “unfair” and “inefficient” tax system.
Among the options suggested by the IFS are:
The think tank says it would be “possible for the chancellor to raise tens of billions of pounds a year more in revenue without breaking the letter of Labour’s manifesto promise not to increase the ‘big three’ taxes” – but they admitted it would “not be straightforward”.
Ms Reeves is facing increasing pressure to rescue the UK’s troubled finances in the Budget, but Labour only has limited options as a result of the party’s manifesto pledge not to raise income tax, VAT or national insurance contributions for working people.
The IFS also called for a wider overhaul of the council tax system, arguing that banding is still based on the value of properties as of 1991 and must be updated to end a “regressive” and “hard to justify” rate structure.
It said a “good end goal” would be to replace stamp duty on housing and council tax with a “new recurrent property tax” proportionate to updated values.
“Changing rates and thresholds is all very well, but unless the chancellor is willing to pursue genuine reform it will be taxpayers that shoulder the cost of her neglect,” the report, which forms a chapter in the IFS’ wider budget assessment for 2025, says.
Isaac Delestre, a senior research economist at the think tank and an author of the chapter, said Ms Reeves would have “fallen short” if she limits her ambition to a dash for revenue without wider reform.
“Almost any package of tax rises is likely to weigh on growth, but by tackling some of the inefficiency and unfairness in our existing tax system, the chancellor could limit the economic damage,” he said.
“The last thing we need in November is directionless tinkering and half-baked fixes. There is an opportunity here.
“The chancellor should use this Budget to take real steps down the road towards a more rational tax system that is better geared to promoting the prosperity and well-being of taxpayers.”
Their report came after Treasury sources told the Telegraph the chancellor will target those with higher incomes or more wealth at the budget.
But Sir Keir’s cabinet is deeply divided on the issue, with senior ministers fearful further measures to target the rich in next month’s Budget could accelerate the wealth exodus from Britain.
Cabinet ministers last week told the The Independent they believe Ms Reeves has already gone too far with measures targeting the wealthy and businesses, urging the chancellor to change course if she is to have any hope of achieving growth.
They cited “anti-aspiration” measures such as the abolition of non-dom status and VAT on private school fees as key drivers of wealth away from the UK, saying they are “harming this country”. Further measures reportedly being considered include a property tax on high-value homes and a new bank profits tax.
It is understood that officials currently believe the Office for Budget Responsibility will lower its forecasts for productivity growth, which would mean an extra £20bn worth of tax rises would be required.
Another £5bn would be needed to pay for the government’s decision to row back on welfare reforms earlier this year, while a further £5bn is thought to be needed to pay for higher than expected interest payments.
