How can Labour raise revenue without raising income tax?

Labour pledged in their election manifesto that they would not raise the rates of income tax, national insurance, VAT or corporation tax. How then will the new UK government manage to fill the £40 billion black hole in the country’s finances?

Income tax is the biggest income generator for the government, mainly due to personal income making up the majority of total national income.

It seems Labour have made life difficult for themselves and may need to raise taxes elsewhere. Capital gains tax and inheritance tax reliefs and rates are likely to face scrutiny by the new Chancellor and changes could be announced at the Autumn Budget on 30th October 2024.

But how much more can the government generate from these two taxes alone and will it be enough?

The Chancellor, Rachel Reeves, will host the Autumn Budget, her first on,e and she has indicated already that tax rises are coming. Reeves may have to revisit income tax and find creative ways to generate more cash.

For example, the Chancellor could raise the thresholds for higher earners, very much like the Scottish Government have done. In Scotland, higher rate taxpayers pay 45% on their income at £75K or over. The prime minster, Keir Starmer, has made it quite clear that ‘working people’ would not be impacted by tax rises, but has made no mention of higher rate income tax earners. The government could follow the Scots and keep the income tax rates the same but reduce the threshold at which higher rate earners start paying the higher rate of tax, whilst preserving their manifesto promise.

Another way to keep income tax rates the same, but leverage the earnings for higher rate taxpayers, is to phase out the personal allowance, or tax free income an individual earns in a tax year, at a lower threshold, versus the current £100,000 position. Again, the government breaks no manifesto promises if it opts for this tax raising strategy.

Another major change that is rumoured is the consideration of removing the tax relief on higher rate pension contributions. Currently, if you are a higher rate income taxpayer, you can claim a total of 40% tax relief on your pension contributions on earnings that you pay 40% income tax on. This proposal could be a big money spinner for the government as it currently costs them circa twenty four billion pounds per annum to fund. Even if they reduce the higher rate tax relief rather than abolishing it altogether, it could mean big savings on pension tax relief payouts.

Unfortunately, some or all of these options may have unintended consequences and not raise the anticipated large tax revenue the government desperately need. Instead of raising revenue, higher earners may decide to take their tax money elsewhere. Wealthy individuals have more choices and are more mobile than basic rate taxpayers. By penalising only the wealthy, what will stop them from leaving the UK and taking their tax money with them?

Until the Autumn Budget on 30th October 2024, there will be much speculation on what Rachel Reeves will do. One things is for sure, tax rises are coming and this is the Chancellor’s main and arguably only opportunity to bring in a raft of tax rises and push blame to the previous government.