As the Prime Minister warned last month, “There’s a Budget coming in October, and it’s going to be painful.” The spectre of tax increases looms so large that the Telegraph is having to ration hyperbole in advance, in case it runs out. The Daily Mail is concerned that after the “tax raid on the middle classes” there will be few pearls left for its columnists to clutch, presumably because Rachel Reeves will have cashed them in to spend on libraries.
The truth is that the tax raid on the middle classes has already happened, thanks to two previous chancellors. Rishi Sunak froze the personal tax thresholds in his 2021 spring Budget, and Jeremy Hunt maintained the freeze until 2028 – a seven-year tax hike, equivalent to a 4 per cent increase in income tax, aimed squarely at millions of middle-class workers.
Unfortunately, Sunak and Hunt also froze the expected spending of government departments at 2021 levels, effectively pretending that a historic bout of inflation and geopolitical uncertainty weren’t happening until they’d lost the election, by which time the spending pressures they hadn’t accounted for were in the tens of billions. Hence Starmer’s repeated imprecation that, while he is very fond of us all, we are going to have to taste the pain of his high-tax regime.
How to cope in this new socialist nightmare? The first step is to go through Labour’s options and ask which, if any, might affect you. The most talked about tax hike is equalising rates of capital gains tax (CGT) with income tax. This has been done in the past so making them equivalent to the rates paid by workers seems fair. Capital gains were once called “unearned income” and taxed at up to 98 per cent; there are good arguments for taxing them harder. The real controversy is whether it will actually raise any money, but there’s only one way to answer that.
Will it affect you? Only 369,000 people paid CGT in the 2022-23 tax year. You don’t have to pay it if you sell your home and the personal allowance is £3,000, so if you own less than £40,000 in shares (appreciating at the FTSE100’s average growth rate of 7.2 per cent), you won’t be paying any. If you own a million pounds’ worth of shares appreciating at that rate, you’ll pay about an extra £9,000 in tax, which shows you have to be very wealthy before this makes a significant difference.
The CGT hike is therefore a raid on the very small group of around 5,000 people who make more than half of all capital gains. Two tips for them: one, buy government bonds (the Chancellor doesn’t charge CGT if you’re lending her money); and two, reflect on the fact that even the very wealthy have to use the same roads and A&E departments as everyone else, so perhaps a functioning country is worth paying for.
Other measures, such as removing tax reliefs on business asset disposal, inheritance tax loopholes and the “carried interest” dodge that allows private-equity financiers to pay a lower rate of tax than their cleaners, are unlikely to be of any real concern to the middle class.
Of more concern is the idea that the government could raise up to £10bn a year by changing pensions tax relief. The last thing we need is to dissuade people from saving more, especially those who don’t enjoy the gold-plated pensions of the public sector. As a stealth tax, however, I fear it is politically achievable, because it won’t show up in people’s day-to-day finances for many years to come. Similarly, cutting the tax relief on employer pension contributions could discourage firms from offering more generous pension schemes.
One measure that could be really noticeable is the end of the fuel-duty freeze. While petrol suppliers have not been passing this saving on to drivers, that won’t stop them hiking prices in response. Similarly, banks may squeeze customers in response to a windfall tax on the extra profits they’ve made from higher interest rates.
The best response is to be better informed. Work out which of these measures really affects you, and by how much – you may find they’re in sharp contrast to some headlines – and you’ll be able to plan accordingly.
[See also: How Nvidia broke the market]
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This article appears in the 04 Sep 2024 issue of the New Statesman, Starmer under fire