Andy Burnham and Chancellor John Healey are preparing a Budget that could also shape the timing of a snap election. The Prime Minister and Chancellor are reportedly reviewing a Budget submission from Labour donor Dale Vince, founder of green energy firm Ecotricity.
Vince's proposal involves hiking two taxes to fund a tax cut that could boost millions of lower earners. According to his modelling, the plan could put £600 a year into the pockets of lower earners.
Funding the Tax Cut
One proposal is to axe the interest the Bank of England pays commercial banks on reserves they hold with it. This currently hands big banks between £20 billion and £40 billion a year. However, paying interest on reserves is part of how the Bank controls short-term interest rates and conducts monetary policy, so scrapping it would require another mechanism.
The second proposal is a hike to capital gains tax (CGT), which is charged when people sell assets such as shares held outside an ISA, second homes, antiques, cryptocurrency and businesses. Currently, basic rate taxpayers pay 18%, while higher and additional rate taxpayers pay 24%. Labour politicians, including Burnham backer Louise Haigh, have argued for raising the upper rates to 40% and 45%.
Potential Risks and Benefits
Vince's submission claims the CGT hike could raise £14 billion. However, when HMRC modelled a CGT hike, it found a 10 percentage-point increase in the higher rate could actually cut the amount collected by around £3.5 billion a year by 2028-29, as people hold onto assets rather than sell them.
There is also a danger that hitting successful businesses and entrepreneurs too heavily could make Britain a less attractive place to invest, build companies and create wealth.
Personal Allowance Boost
The plan could also address the personal allowance, which has been frozen at £12,570 since 2021-22 and is due to stay there until 2030/31. Reports suggest Burnham and Healey would like to hike it by £3,000, lifting it to £15,570. That would cost around £20 billion but could save the lowest fifth of earners £600 a year, money they would mostly spend, which could help boost the economy.
It would also deal with a looming state pension problem, as the new state pension is set to rise above the £12,570 personal allowance next year, dragging more pensioners into income tax.
The radical proposition could put a tax break, rather than another tax rise, at the centre of the October 28 Budget. If Burnham followed up with a November election, with the promise of hiking the personal allowance from next April, he could get the mandate he wants. In the longer run, with Labour in power for another five years, the tax hikes could soon start rolling along.
