Prime Minister Andy Burnham’s administration is reportedly exploring a significant increase in capital gains tax (CGT) to as high as 45%, as part of a broader fiscal strategy aimed at boosting the income tax personal allowance. This potential tax overhaul, detailed in a submission to the Treasury, could represent a substantial tax increase designed to fund a notable rise in the amount individuals can earn before paying income tax.
Proposal Details and Funding Mechanisms
The core of the proposal involves raising the income tax personal allowance from its current £12,570 to £15,570. This would effectively allow individuals to earn an additional £3,000 tax-free. The overall financial impact on the Exchequer is estimated to be around £20 billion.
According to a Budget submission prepared by Dale Vince, founder of green energy firm Ecotricity and a known Labour donor, the proposed increase in capital gains tax to 45% would generate an estimated £14 billion. Vince’s submission argues that wealth is currently taxed at a lower rate than income, and aligning CGT with income tax bands would address this disparity. Ecotricity has been a significant contributor to the Labour party, having donated £6 million since 2013.
The remaining funding for the personal allowance increase would reportedly come from discontinuing interest payments on Bank of England reserves. If implemented, these combined measures would finance the £3,000 increase in the personal allowance, bringing it closer to the level it might have reached had it not been frozen since 2021 under the previous government.
Potential Economic and Social Impact
Analysis from the National Institute of Economic and Social Research suggests that such an increase in the personal allowance could provide a financial uplift of approximately £600 per year for households in the lowest fifth of earners. This initiative is being considered amidst growing pressure on the government to alleviate the cost-of-living crisis, particularly with anticipated rises in household energy bills looming.
The frozen personal allowance has become a politically charged issue. As incomes and pension payments rise, individuals who were previously below the tax threshold may now find themselves liable for income tax. This situation has drawn attention from various political figures and stakeholders.
Political Support and Considerations
Prime Minister Burnham has previously acknowledged the concerns surrounding the frozen allowance, noting it was a frequent topic of discussion during his election campaign. While he has indicated a willingness to consider increasing the threshold, he has also cautioned about the potential financial implications and the need for careful consideration ahead of the Budget.
Support for aligning capital gains tax with income tax rates has also emerged from within the Labour party. Cabinet minister Louise Haigh has previously advocated for this shift, arguing it would help rebalance the tax burden away from earned income and towards accumulated capital that is not actively invested. Defence Secretary Wes Streeting has also voiced support for a robust wealth tax system.
Furthermore, trade union leaders have added their voices to the call for action. Sharon Graham, general secretary of Unite, has urged the Prime Minister to raise the personal allowance to provide direct financial relief to workers.
Fiscal Challenges and Budget Outlook
The proposals present a complex fiscal challenge for Chancellor John Healey as he prepares the upcoming Budget. The potential to fund income tax relief by increasing taxes on capital gains highlights a delicate balancing act. Any adjustment to CGT rates could have significant repercussions for investors, entrepreneurs, and the broader tax base.
For Prime Minister Burnham, the decision on capital gains tax and the personal allowance is shaping up to be one of the most significant policy choices of the October Budget. The government faces the dual task of providing tangible relief to households struggling with economic pressures while ensuring the stability and control of public finances.
Understanding Capital Gains Tax
Capital Gains Tax (CGT) is a tax on the profit (the “gain”) when you sell or dispose of an asset that has increased in value. This can include things like property (that isn’t your main home), shares, and some personal possessions. The current rates in the UK vary depending on an individual’s income tax band, with higher rates for higher earners. The proposal to increase the rate to 45% would bring it in line with the top rate of income tax.
The Income Tax Personal Allowance Explained
The income tax personal allowance is the amount of income you can receive each tax year without having to pay any income tax on it. If your income is below this threshold, you do not owe income tax. The current allowance of £12,570 has been frozen since April 2021. Freezing the allowance means that as people’s incomes rise with inflation, more of them can be brought into the tax system, effectively acting as a stealth tax increase. Raising it, as proposed, would provide direct relief to millions of taxpayers.
