Families and businesses brace for tax hits as the Chancellor grapples with a growing funding gap
Daily Telegraph 27/10/26
Millions of households are bracing for further tax rises as John Healey prepares to deliver his maiden Budget on Wednesday.
With narrowing fiscal headroom, a ballooning welfare bill and the total government debt at £3tn for the first time, the Chancellor will be forced to walk an economic tightrope to avoid causing a spike in UK gilt yields.
Mr Healey also faces sustained economic fragility stoked by conflict in the Middle East. Driven by rising government borrowing costs, the Exchequer is forecast to be £11bn worse off by 2029-30 than expected in March, according to the Institute for Fiscal Studies (IFS).
Households are already facing tax increases on income from savings and rental properties from next April. It comes in addition to the continued squeeze on British workers from tax threshold freezes and plans to drag pensions into the scope of inheritance tax next year.
Mr Healey has already ruled out further capital gains adjustments, but he is understood to have drawn up plans for a tax raid on family businesses when owners pass their company to the next generation.
In relief for low-income state pensioners, he is expected to announce a rise in the tax-free allowance. The move will reportedly cost taxpayers £200m a year by the end of the decade.
All this comes amid mounting pressure to increase defence spending. Obligations to find additional funding for defence while keeping the record-high cost of government borrowing under control have caused headaches for Treasury officials. The Chancellor is expected to pledge £20.4bn of support to the UK’s National Wealth Fund and British Business Bank to avoid breaking the country’s fiscal rules.
Additional spending could be financed by a tax raid on banks, despite Mr Healey previously describing them as “the jewel in the British economic crown”. The Chancellor is poised to raise the surcharge on bank profits above £100m from 3pc to 8pc, taking the total tax take for UK banks even higher than other financial centres such as New York and Frankfurt.
Advocates of the squeeze on banks argue that it could raise £2bn for the Treasury, but the International Monetary Fund (IMF) urged Mr Healey to cut welfare spending instead.
Meanwhile economic volatility has also driven large market fluctuations in recent weeks. The average shelf-life of a mortgage deal fell to just 16 days this year, pinching the pockets of prospective buyers and existing homeowners, an analysis from Moneyfacts found.
Hamstrung by Labour’s manifesto commitments to not raise income tax, VAT or employee national insurance, Mr Healey’s options to find cash for spending commitments are limited.
An increase in capital gains tax was finally ruled out last week by the Chancellor, but weeks of uncertainty sent jitters through the financial markets. During September, UK investors sold a record number of stocks and shares in an effort to bank their gains before the Budget, brokers revealed.
Despite warnings about hits to entrepreneurship in Britain, Mr Healey has reportedly drawn up plans for a tax raid on family businesses when owners pass their company on to the next generation.
Many business owners convert their holdings into “redeemable shares” when wanting to retire or relinquish control. Higher-rate taxpayers are consequently charged 24pc capital gains tax on such a transaction. But the Chancellor is considering charging income tax when business owners pass the company down to the next generation, imposing a tax rate of 45pc.
The change would force a business owner to pay £450,000 in tax when passing on a £1m business rather than £240,000 under current rules.
Such changes would raise £300m per year for the Treasury, although the Government has been warned that reducing the incentive for entrepreneurs could lead to an overall loss of revenue.
Andrew Griffith, the shadow chancellor, said: “Labour is determined to destroy millions of family businesses across the UK. Most are small businesses that, like farms, are already being crushed.”
The Treasury has also put together plans for a “green tax” on imported fuel. A “carbon charge” on refined products such as petrol and diesel imports is under consideration, which would subject imported fuel to the same net zero costs as fuel refined in the UK.
Proponents claim that expanding the “carbon border adjustment mechanism” (CBAM) to imported fuel could transfer the additional cost to consumers, forcing customers to pay more at the pump. With fuel duty frozen until Dec 31, 2026, motorists would be spared from the immediate effect of an expansion of CBAM, but Labour is yet to announce an extension to this freeze.
Taxes account for around 53p per litre for petrol and diesel, with VAT adding an additional 24p, but Labour’s “carbon charge” could push the tax take up even further.
‘SUV tax’ on heavier vehicles
Motorists are expected to also be squeezed by a tax on large cars in the Budget. A so-called “SUV tax” on heavier vehicles such as family cars is under consideration after the Treasury was reportedly lobbied by Transport & Environment (T&E), a clean energy group.
T&E has estimated that a large vehicle levy could raise more than £1.7bn annually and that it would be charged at a flat rate of £10 for every kilogram by which a car exceeds 1,600kg.
In an effort to raise another £1bn, Mr Healey is expected to crack down on online marketplaces. Retailers such as Amazon, eBay and Temu will be made responsible for collecting tax owed by retailers selling on their platforms.
The policy will close a loophole that allows predominantly overseas sellers to capitalise on lax tax enforcement.
But some of the money generated from the tax is expected to be spent on increasing the tax-free allowance for low-income pensioners to cover the increase in the state pension by £489 to £13,036.
Relief for retirees solely reliant on the state pension is estimated to cost the taxpayer £200m each year, but no such relief will be awarded to individuals with higher incomes, such as those with workplace or private pensions.
In recent Budgets, the Government has increased the tax paid on rental income, a change set to come into effect from April 2027. But, economists have warned that any further assault on the property sector would have broader detrimental impacts.
“Landlords are now really very heavily taxed relative to people who invest in other assets,” said Stuart Adam, a senior economist at the IFS.
“At least part of that [cost] is going to be passed on to the tenants in higher rent,” he added.
Andy Burnham has previously suggested raising the top rate of income tax from 45p to 50p to fund an increase in the personal allowance from £12,570 to £15,000, but Treasury officials have been tight-lipped about any changes to income tax in the weeks leading up to the Budget.
Dan Neidle, of Tax Policy Associates, said an increase in the personal allowance would provide “a broad but extremely shallow tax cut”. Even increasing the personal allowance by £500 – equivalent to £6bn in government spending – would only make basic-rate taxpayers £2.70 better off per week in reality.
At the same time, IMF forecasts suggest that total government revenues from tax will grow to 41.9pc of GDP by the start of the next parliament, the fastest pace in the Western world.
“The Budget [...] must be about giving business breathing space and backing wealth creation,” said Rain Newton-Smith, the chief executive of the Confederation of British Industry.
At least half a dozen tax increases have been confirmed ahead of the Budget, leaving cash Isas, pensions, rental profits, valuable homes, electric vehicles and savings income more exposed to the taxman.
Valentin Boboc, a senior economist at the Institute of Economic Affairs, said: “Even if the Chancellor announces no new taxes, the tax burden would continue to increase. This is because a number of taxes, including income tax and national insurance, have their thresholds frozen, so people often pay higher rates of tax as their earnings rise.”
A Treasury spokesman said: “As has always been the case, decisions on tax are a matter for the Chancellor to set out at fiscal events, rather than routinely commenting on rumour, speculation or proposals.”
Comments
Post a Comment