What taxes might be raised in the Budget?

Chancellor Rachel Reeves has warned that her first Budget will involve “difficult decisions” on tax, spending and benefits.

Shortly after Labour took power, Reeves said the government would have to increase taxes to plug what it claimed was a £22bn “hole” in the public finances.

Earlier this month, government sources said the chancellor was looking to make tax rises and spending cuts to the value of £40bn in the Budget, which will take place on 30 October.

Labour has ruled out raising taxes on “working people”, including VAT (value added tax), income tax and National Insurance.

So which taxes might go up?

One option is though what has been dubbed a stealth tax – a means of raising revenue which is not explicitly labelled or intended as a tax.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), believes the most obvious solution would be to focus on tax thresholds – the amount of money you can earn before any tax starts to be paid.

Currently the thresholds on income tax and National Insurance are frozen until 2028, a policy brought in by the previous government. The chancellor is now said to be weighing a plan to continue the freeze beyond that.

The policy amounts to a tax rise because of a process called “fiscal drag”, which sees more people “dragged” into paying higher rates of tax as their wages rise.

The Resolution Foundation, a think tank that aims to improve living standards for low-to-middle income families, calculates the current freeze will generate about £40bn of revenue by 2028.

Reports suggest extending the freeze could raise an extra £7bn a year.

While the Labour Party’s election manifesto ruled out raising National Insurance (NI) it appears increasingly likely that NI payments made by businesses will rise.

The chancellor has given signals that employers will face higher NI contributions, and Prime Minister Sir Keir Starmer has not ruled out the rises either.

Employers pay NI at a rate of 13.8% on all employees’ earnings above £175 per week, but pension contributions made by employers are currently exempt from the levy.

Treasury officials are reportedly exploring NI on employer pension contributions to raise revenue.

Businesses have hit out over a potential change, arguing it will make hiring staff and creating jobs harder.

The government is considering changes to inheritance tax in order to raise more money, the BBC understands.

It is not known how many people are likely to end up paying more, nor how much more they would pay.

It is understood the prime minister and the chancellor are considering multiple changes to the tax, which currently includes several exemptions and reliefs.

Inheritance tax, currently paid at a rate of 40%, is charged on the part of a deceased person’s estate above a threshold of £325,000.

But it only applies to fewer than one in 20 estates.

No tax is paid if the estate is valued at less than £325,000, or if anything above this threshold is left to a husband or wife, civil partner, charity, or a community amateur sports club.

And if a home is part of the estate and a person’s children and grandchildren stand to inherit it, the threshold can go up to £500,000.

Reeves could raise the rate of inheritance tax, or curb the relief available on certain inherited assets.

Current exemptions and reliefs include rules around gifts that are given while you are alive. Gifts given less than seven years before you die may be taxed.

Other exemptions include agricultural land and pension savings, which can both be inherited tax-free.

There are also allowances for unquoted shares, which are shares in a business not listed on the stock exchange.

Another route Reeves could take is to put up capital gains tax (CGT).

This is charged on the profit made from the sale of an asset that has increased in value, with some examples including stocks that are not held in ISAs or second homes.

CGT is payable by individuals, but also self-employed sole traders, partners in business partnerships and company owners, among others.

It starts at a rate of 10% (or 18% on residential property) on profits above £3,000. It then rises to 20% on any amount above the basic tax rate, or 24% on residential property.

Critics point out that CGT rates are substantially lower than income tax. They say this can benefit wealthier people and Reeves could opt to level the playing field or cut some CGT tax breaks for businesses.

There has been speculation that rate could be increased in the Budget, although the prime minister appeared to dismiss suggestions that it could rise as high as 39%.

Industry groups have warned that increasing CGT could hit those at the centre of Labour’s plans to grow the economy.

“No government at all serious about growth would hike CGT on entrepreneurs selling a small business,” Tina McKenzie from the Federation of Small Businesses (FSB) told the BBC.

Fuel duty is a tax that is levied on purchases of petrol, diesel and other fuels – the level it is set at should have an impact on what drivers pay at the pumps.

The levy is a “significant source” of revenue for government, according to Office for Budget Responsibility, with £24.7bn expected to have been raised in 2023-24.

But fuel duty has not been raised in more than a decade. Between 2012 and 2022 it was frozen at the same level.

In March 2022, the then Conservative chancellor Rishi Sunak cut it by 5p a litre after Russia’s invasion of Ukraine led to record pump prices.

However, some motoring groups have argued this cut – which is due to end in March next year – has not been passed on to drivers.

This has prompted the RAC to suggest the cut should be scrapped by Reeves in the Budget, and the prime minister has not ruled out a rise in fuel duty in the Budget.

Simon Williams, head of policy at the RAC, said the motoring group had reached the conclusion the chancellor “has no option but to put fuel duty back up”.

Reeves “knows the 5p discount is losing the Treasury £2bn a year,” he said.

When people or their employers pay into private pension pots, they receive tax relief on these contributions, up to set limits.

The relief allows some of a person’s earnings that may have been taken by government in tax to go into their savings for retirement instead.

Under the current system, savers receive tax relief at the same rate as their income tax – meaning basic rate taxpayers receive relief at 20% and higher rate taxpayers at 40% or 45%.

In the run-up to big political events like the Budget, Tom Selby, director of public policy at AJ Bell, says that there is often speculation that a flat rate of pension tax relief could be introduced, although reports have suggested this is now an unlikely move.

A change would mean the system is less generous for higher earners, but the IFS has suggested this could raise “billions” for the government.

Some opponents have said, however, this could dissuade people from saving for the future and might be difficult to implement.