My previous blog post showed that, based on some reasonable assumptions, the Chancellor could have to find another £30 billion from tax increases.
It is hard to see how this can be done without touching the big revenue raisers – namely income tax, National Insurance (again), and VAT. Indeed, earlier this month the Chancellor reportedly asked the OBR to assess a plan to raise the basic, higher and additional rates of income tax by 2p, partly offset by a 2p cut in employee National Insurance (the ‘two up, two down plan’ originally proposed by the Resolution Foundation).
This could have raised about £6 billion, mainly from those with non-employment income and those above the state pension age. This figure could have risen to about £10 billion if the cut in employee NI had been limited to people earning below the Upper Earnings Limit (currently just over £50,000).
However, this plan now seems to have been dropped. The official explanation is that more favourable OBR forecasts mean that it is no longer necessary to raise income tax rates. But that explanation does not stack up. Any more favourable assumptions – including on borrowing costs and on the tax revenues from wage growth – would normally have been included already in the final pre-measures forecast on 31 October. The ‘two up, two down’ tax plan reportedly came later.
It is more plausible that the decision to dump the plan to raise income tax rates was based on fears about the political fallout from such a clear breach of the Manifesto commitments.
Nonetheless, the Chancellor could still raise a similar amount of money (relative to existing plans) by extending the current freeze on personal tax thresholds beyond 2028, which would drag even more people into paying higher rates of tax.
Extending the freeze would still breach the spirit of the Manifesto, even if not necessarily the letter. Rachel Reeves herself described this option as a tax on “working people” when ruling it out in her first Budget speech last October.
However, this alternative could also raise at least £8 billion and perhaps as much as £10 billion. Extending the freeze beyond 2028 would also at least delay the pain for taxpayers, compared to the alternative of raising tax rates now, and could be spun as extending a policy first introduced by the previous (Tory) government.
But this could still leave about £20 billion to be raised from other taxes. This has been described as a ‘smorgasbord’ of measures, a label which might appeal to some, but it would be more accurate to call it a ‘dog’s breakfast’.
It is probably still safe to assume that the Treasury will continue to reject calls for a new annual ‘wealth tax’. This is for the simple reason that, based on the experience of other countries and on the evidence from smaller changes in taxes on capital here, an annual ‘wealth tax’ is unlikely to raise a significant amount of money,
But there are many other ways in which the Chancellor could try to find another £20 billion. There is a large menu of individual options, each of which might raise about £2 billion.
Other taxes on ‘wealth’ will surely be raised, perhaps by:
1) increasing Council Tax on higher value properties (a simpler option than creating a new Mansion Tax, though with similar effects)
2) closing Capital Gains Tax ‘loopholes’ (for example, by imposing a new ‘exit charge’ on unrealised gains from business assets, or an additional levy on death)
3) further changes to Inheritance Tax (such as targeting the tax-free gift period)
4) reducing tax breaks on savings (such as lowering the amount that can be saved in cash ISAs, or imposing a new cap on the amount that can be saved in pension salary sacrifice schemes without paying NI on the contributions)
Taxes could also be raised on some forms of income that the Government believes are undertaxed, perhaps by:
5) imposing NI on certain types of partnerships (LLPs) widely used by lawyers, doctors and other professionals
6) levying NI on rental income
There are also likely to be new or increased taxes on some forms of expenditure, perhaps including:
7) a new pay-per-mile tax on Electric Vehicles from 2028 (partly to replace the loss of revenue from fuel duty on petrol and diesel cars)
8) ending the temporary 5p cut on fuel duty (though this is already factored into the OBR’s forecasts)
9) an increase in so-called ‘sin taxes’, notably on gambling (excluding horse racing) and ‘sugary drinks’ (such as milkshakes)
10) extending VAT to more goods and services that are currently exempt or zero-rated, such as some forms of passenger transport (though this would be even harder to square with the stated intention to keep household bills down)
Businesses might not be spared either. Options here include:
11) the VAT threshold could be lowered, from £90,000 to perhaps £30,000
12) there could be a further increase in the Bank Levy
Of course, this is not an exhaustive list. Indeed, the Treasury is said to have considered more than 100 options. But there are three key takeaways.
Firstly, and just about the only positive, some of these tax increases would take time to be implemented, delaying some of the economic hit. Combined with the likely extension of the freeze in personal tax thresholds this would mean that at least half of a £30 billion package of tax increases could be ‘backloaded’, rather than taking effect straightaway (or in April 2026).
Secondly, though, many of these changes could have large and unintended consequences for the economy, especially if they discourage savings and investment, further gum up the housing market, or drive more entrepreneurs overseas.
Most analysis relies on HMRC costings, which do at least attempt to account for the effect of behavioural changes on the tax base in question (see HMRC [2025]). The OBR then attempts to add other effects on the wider economy in its macro forecasts. But this is hard to get even vaguely right, especially when there is such a large number of moving parts.
Third, and related to this, the revenues raised from a dog’s breakfast of smaller tax increases are relatively uncertain, and any figures are more likely to be over-estimates. This is a particular problem with new measures that are as yet untried, and where the costings might unravel as more details emerge.
The taxation of wealth rather than income is inherently more difficult because it is harder to value assets than it is to observe a cash payment. Increased taxes on, say, property may pose additional challenges when dealing with ‘asset-rich’ but ‘income poor’ households, who may struggle to pay a larger tax bill straightaway.
A particular problem with ‘sin taxes’ is that they aim to discourage an activity while still raising money from it – and can end up doing neither. There is ample evidence that ever higher taxes on gambling or tobacco encourage illicit activity and actually reduce revenues, though this may not be immediately obvious.
In short, it would be far better to try to raise more money in a simple way from a larger number of people, rather than try to raise the same amount from a smaller number of people in a variety of different ways.
The choices that Rachel Reeves makes here will have a major impact on how the markets and the wider economy respond – which will be the subject of the next instalment.
Plain-speaking Economics 
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