The one big tax hike tipped for the Budget – and what it would mean for you

Chancellor John Healey has ruled out a planned increase in capital gains tax for the upcoming Budget, opting instead to rely on higher levies on the banking sector to generate revenue. The decision, scheduled for announcement on October 28, marks a departure from earlier suggestions by senior Labour figures who advocated for aligning capital gains rates with income tax. Treasury officials concluded that raising the tax could paradoxically reduce overall government receipts due to behavioral responses by wealthy individuals. Consequently, the primary revenue-raising measure in the statement is expected to target bank profits, potentially reversing recent cuts to corporate tax surcharges or expanding the bank levy. The capital gains tax is currently levied on profits derived from the sale of appreciating assets, including second homes and shares. The standard rates stand at 18 percent for basic-rate income taxpayers and 24 percent for those in higher and additional rate brackets. Despite these existing rates, several cabinet members had publicly supported an increase during the summer. Louise Haigh, the First Secretary of State, argued that the tax should be brought closer to income tax rates to shift the burden away from labor. She suggested a potential rate of 45 percent. Similarly, Wes Streeting, the Defence Secretary, described a higher capital gains tax as a "wealth tax that works," aiming to address the widening gap between earned and unearned income. Both ministers made these arguments prior to Andy Burnham assuming the role of Prime Minister in July. Healey’s rejection of the hike follows internal warnings that the measure would prove counterproductive. Officials at Number 11 expressed concern that increasing the tax would trigger an exodus of wealthy residents from the United Kingdom or prompt them to defer selling assets indefinitely. Because capital gains tax is only triggered upon the disposal of an asset, individuals can easily avoid payment by simply holding onto investments or relocating abroad. Treasury analysis indicates that current rates represent the optimal level for maximizing revenue generation. Any increase beyond this threshold risks reducing total collections. Lord Jim O’Neill, a former advisor to the Prime Minister and Chief Economist at Goldman Sachs, endorsed the Chancellor’s decision. Speaking to The Times, O’Neill stated that raising the tax would send the wrong message to business sectors. He described the decision as eminently sensible for maintaining economic momentum. In a speech delivered last month, Healey emphasized the government’s commitment to wealth creation. He stated that policy decisions must enhance confidence, investment, and profit within British business. He noted that the costs of doing business, including energy bills, regulatory burdens, planning constraints, and labor costs, have risen significantly since the pandemic. Healey declared that growth is the only sustainable solution to these challenges. With capital gains tax remaining unchanged, attention shifts to the banking sector as the principal source of new revenue. The Chancellor is expected to implement measures that increase the tax burden on banks, which have reported substantial earnings recently driven by rising interest rates. The four largest UK lenders, HSBC, NatWest, Barclays, and Lloyds Banking Group, generated approximately £200 billion in pre-tax profits over the past five years. Two specific mechanisms are under consideration. One option involves reinstating the corporation tax surcharge for banks. In 2023, former Chancellor Jeremy Hunt reduced this surcharge from 8 percent to 3 percent while simultaneously raising the headline corporation tax rate from 19 percent to 25 percent. Reversing the surcharge cut is estimated to yield around £2 billion annually. An alternative approach would involve increasing the bank levy, a tax calculated as a small percentage of bank liabilities. Economists suggest that increased taxation on banks could translate into higher costs for consumers. Alper Kara, a professor of economics, finance, and accounting at Brunel University, noted that banks might protect their profitability by lowering savings rates, increasing mortgage and loan interest rates, or raising service fees. However, he added that intense competition in the mortgage market and the presence of digital challengers would limit banks' ability to pass on all costs. Adam French, head of consumer finance at Moneyfactscompare, observed that while history shows additional taxes often reach customers, the impact in the current high-interest-rate environment is likely to be marginal. He explained that unlike the near-zero rate era of the 2010s, current conditions provide banks with more capacity to absorb additional tax burdens. Beyond banking, the Budget is expected to include measures aimed at alleviating household energy costs. Prime Minister Andy Burnham has already reduced Value Added Tax on electricity bills, but further assistance is anticipated ahead of the January increase in the energy price cap. Reports indicate the government is preparing to spend over £1 billion on expanded support for vulnerable households. This may take the form of an extension to the Warm Home Discount, which currently provides a £150 annual rebate to eligible benefit recipients. The discount could be increased by an additional £100. Additionally, ministers are preparing a crackdown on online retail tax evasion. The proposed policy would require major marketplaces such as Amazon, eBay, and Temu to collect Value Added Tax on behalf of third-party sellers, particularly foreign vendors. This measure is projected to raise up to £1 billion, with proceeds earmarked for reducing business rates for high-street retailers. Details regarding the "Your First Home" scheme will also be outlined in the statement. Announced by Burnham last month, the initiative aims to assist first-time buyers by allowing mortgages with deposits as low as 2.5 percent. The scheme includes a loan component covering 20 percent of the property value. Meanwhile, the fiscal backdrop presents challenges. Healey faces pressure to fund increased military spending and fulfill campaign pledges. Analysts suggest that rising UK borrowing costs may have eroded the £24 billion fiscal buffer established by his predecessor, Rachel Reeves, potentially halving the available headroom. In response, Conservative Leader Kemi Badenoch is expected to use her pre-Budget speech on Tuesday to urge the government to reduce borrowing and scale back spending plans. Critics, including Caitlin Boswell of Tax Justice UK, have labeled the decision to skip a capital gains tax rise a missed opportunity for fairness, arguing it leaves the government out of step with public sentiment regarding wealth distribution.