Raquel Reeves could increase capital gains tax on sales of second homes and businesses as she struggles to find ways to raise money in the Budget, it was claimed today.
The Chancellor is said to be looking to increase CGT from a typical level of 24 per cent to 39 per cent.
The measure could reach hundreds of thousands of people who already pay large amounts of tax to the Treasury, with the Guardian claiming that internal modeling suggests it could generate additional revenue of around £1 billion.
However, reaching the extreme of the increase could actually leave the yield lower after five years.
In a sign of the scale of the problem facing Reeves, a senior source told the newspaper he feared “some very important tax decisions would be left too late”. Another said tax rise proposals were in “complete disarray” less than three weeks before the Budget.
However, Treasury sources dismissed accusations of chaos, while refusing to comment on the details of fiscal plans ahead of the tax package.
The claims came as think tank IFS said Ms Reeves needs to bring in an extra £25bn to deliver on promises and balance the books after her public sector pay splurge.
The massive attack would be almost twice the size of the coalition's austerity measures following the credit crisis – with fears that national insurance, pension funds, inheritance tax and capital gains are in the line of fire.
Rachel Reeves needs a £25bn tax bomb to deliver on her promises and balance the books after her public sector pay bluster, a grim report warned today
The grim assessment comes from respected think tank IFS as the Chancellor prepares for the Budget on 30 October
Keir Starmer stoked alarm at PMQs yesterday when he repeatedly refused to rule out increasing employers' NICs. There is growing speculation that Reeves will impose the levy on company pension contributions, which could potentially raise £17 billion a year.
Tax-free access to pension funds could also be undermined, while many expect increases in inheritance tax and transfers to dairy entrepreneurs.
Currently, individuals pay 24 percent on income from residential property other than their primary residence.
There is a tax of 18% to 28% on earnings from carried interest in a mutual fund. And 20% on gains from some other assets.
The 5p fuel tax cut brought in by Rishi Sunak is also widely predicted to be scrapped.
Meanwhile, Reeves could ease budgetary rules so the government can borrow up to a further £60 billion, despite concerns about rising costs of servicing Britain's £2.7 billion debt mountain. This will be invested in infrastructure spending, with HS2 expected to run as far as Euston and a new “light” link from Birmingham to Manchester being considered.
In the report published today, the IFS concluded that the Chancellor would need a £16 billion tax rise to remain on track to balance the budget in 2028/29, if there are no cuts to spending outside public services.
This would be on top of the £9 billion tax increase arising from measures set out in Labour's manifesto, adding up to almost £25 billion in total – equivalent to around £900 per UK household.
But the party's promises not to raise income tax and corporation tax or to increase Social Security or CUBA mean it may struggle to implement a tax increase on that scale.
It would be greater than the net tax increases recorded in July 1997, which was £14 billion, and in October 2010, which was £13 billion.
The report states: “Ensuring that all departments see their daily budgets rise at least in line with national income would require an additional £17 billion boost. Combining this with a further tax rise of £16 billion (0.5 per cent of national income) would restore the current budget forecast to balance in 2028-29.
“This, of course, would need to be on top of the £9 billion of specific tax increases set out in the Labor Party manifesto, so it would be a tax increase of around £25 billion in total. A net tax increase of this scale would be larger than in the July 1997 and October 2010 budgets, both of which occurred at the start of a new government's parliament.'
IFS director Paul Johnson said Reeves' first budget, which she will deliver on October 30, could be “the most important since at least 2010”.
He added: “The new Chancellor is committed to increasing investment spending and funding public services. To do this, it will need to increase taxes, or loans, or both.
“Taxes are at an all-time high and she is severely constrained by her promises not to raise the top rates of income tax or corporation tax, or to increase Social Security or VAT.
«The temptation then is to borrow more, perhaps changing the definition of debt targeted by tax rules.
But given his promise to balance the current budget, this would not free up additional resources for day-to-day spending and, in any case, is not without risk given the dual deficits – that is, both the budget deficit and the account deficit current – being administered by the United Kingdom.
He said any change to capital gains tax would need to be a “thoughtful reform” and not a simple increase. There is also speculation that the Labor Party could make changes to inheritance tax.
Employers currently pay NICs at 13.8% on wages for workers above £9,100 per year.
But companies don't pay any National Insurance on the money they invest in pensions on behalf of their staff.
The IFS has previously suggested that the rule “should be reformed”, calculating that if employers were charged NI on pension contributions at the same rate as wages – 13.8 per cent – this could raise £17 billion per year.
Tom Selby, director of public policy at stockbroker AJ Bell, said: “This seems like the simplest way to raise money quickly if the government wants to raise money from pensions. It wouldn't be a surprise.
However, Selby said he would expect there to be a reduced tax rate on employer contributions, rather than the full 13.8 percent tax burden.
There were warnings that the move would harm pension funds and undermine efforts to bolster the savings of poorer workers with automatic enrollment.
Keir Starmer stoked alarm at PMQs yesterday by repeatedly refusing to rule out increasing employers' NICs
The 5p fuel tax cut brought in by Rishi Sunak is also widely predicted to be scrapped
During the first clash of PMQs since the party conferences, Mr Sunak asked the Prime Minister whether his pledge not to increase NICs extended to employers' pension contributions.
But Sir Keir limited himself to saying he would not speak about the Budget and claimed that Sunak was the “expert on tax increases”.
A spokesperson for Her Majesty's Treasury said: 'It is correct to say that we have inherited a difficult financial position, but we will not allow the challenges of the past to define our future.
“Despite having discovered a £22 billion black hole in our public finances, we are focused on making this the most pro-growth Treasury in history, built on the rock of economic stability, including robust fiscal rules that were set out in the manifesto .
“This is how we will improve our public services and deliver on the promise of change.”
The IFS report was funded by the Nuffield Foundation's charitable trust and used economic forecasts from banking company Citi.
