How UK PM Burnham’s Government Could Increase Taxes Explained
Potential Tax Policy Changes Under Burnham
By David Milliken
LONDON, July 20 (Reuters) - New British Prime Minister Andy Burnham has said he may ask people to pay "a little more" in tax as the country faces major spending pressures from an ageing population and a need to rebuild its armed forces as well as broader investment goals.
Tax as a share of British economic output is already forecast to rise to 37% this year — its highest since 1948 and more than in the United States or Japan, but below other big European countries with more generous state pension provision.
Burnham has said he will keep the fiscal rules of finance minister Rachel Reeves, which require him to balance day-to-day spending with tax revenues within three years.
He has also backed Labour's 2024 pre-election manifesto which ruled out many tax increases.
Last week the International Monetary Fund said the government should reprioritise existing spending before raising taxes further.
Following are some of Burnham's options if he does choose to raise taxes.
Income Tax, National Insurance and Value-Added Tax
Current Commitments and Recent Changes
Labour's 2024 manifesto ruled out increasing the rates of income tax, national insurance or value-added tax, which together account for nearly two thirds of total tax revenue.
However, Reeves did increase the employers' component of national insurance payments by £26 billion ($35 billion) a year in her first budget, arguing it was not covered by a pledge not to raise taxes on working people.
Threshold Freezes and Revenue Implications
Labour, like previous governments, has also frozen the salary levels at which the 20%, 40% and 45% rates of income tax become payable, meaning average tax rates rise as wages go up over time. Thresholds are already frozen until 2031, so cannot become an immediate source of new revenue, but would raise £5 billion a year if frozen beyond that.
VAT Exemptions and Policy Considerations
Last week the OECD said Britain should review VAT exemptions — which range from most food to ebooks. Pensions minister Torsten Bell said such a change would be inconsistent with government attempts to cut the cost of living, which Burnham also prioritises.
Burnham has previously spoken in favour of a lower 10% VAT rate for hospitality businesses and in a Times interview on Monday he noted public concern that the starting threshold for paying income tax had stayed frozen at £12,570.
Corporation Tax and Business Rates
Corporation Tax Policy
Corporation tax on company profits makes up 9% of tax revenue, while business rates — a tax on occupiers of commercial property — contributes 3%.
Labour has promised not to raise the rate of corporation tax but the tax office estimates that £21 billion a year is underpaid, mostly by small and medium-sized businesses.
Business Rates Reform
Burnham has said he wants to shift the burden of business rates more towards out-of-town warehouses and superstores and away from shops and pubs in expensive town-centre locations.
Capital Gains Tax
Wealth Taxation and Policy Proposals
Burnham told Labour Party members last year that Britain "overtaxed labour and undertaxed" wealth, making capital gains tax a likely target for raising revenue.
Capital taxes account for 5% of government revenue, compared with 30% from income tax, and CGT is charged at lower rates than income tax.
Potential Reforms and Challenges
Former health minister Wes Streeting — once seen as a potential challenger to Burnham — proposed bringing the CGT rate in line with income tax but only charging it on gains that are greater than inflation.
The IMF said this could be viable but warned capital taxes were more prone to avoidance than other taxes as some gains could be booked outside of British jurisdiction.
Council Tax and Stamp Duty Land Tax
Current System and Criticisms
Council tax is the main tax on residential property in Britain and makes up 5% of revenue. It is based on an estimate on what a property would have been worth in 1991 — leading to outcomes which Burnham has called "highly regressive".
Proposed Alternatives
Campaign group Fairer Share lists Burnham as a supporter of a proposal to replace council tax and stamp duty land tax on property purchases with an annual 0.48% levy on up-to-date property values.
That would push up tax payments by people in London and other areas with high housing costs and lower them in cheaper areas — and bring potential windfall gains and losses in property values for landlords and home owners in the most affected areas.
Fuel and Alcohol Duty
Revenue and Policy Trends
Duties on fuel and alcohol each account for 2% of revenue. Fuel duty is set in cash terms and although budget plans assume it will increase each year in line with inflation, no government has done so since 2011 for fear of angering motorists.
Other Taxes
Proliferation of Smaller Taxes
Instead of increasing broad-based taxes, British governments have added many smaller ones — 14 since 2020, taking the total number of taxes on the statute book to the highest in 200 years, according to research by former tax lawyer Dan Neidle.
Risks of Narrow-Based Taxation
However, the Institute for Fiscal Studies warned that raising significant revenue from taxes that apply only in narrow circumstances increases the risk of economic distortions.
Exchange Rate Information
($1 = 0.7431 pounds)
(Reporting by David Milliken; Editing by Toby Chopra)
