The Budget 2026: Where the Chancellor should look

In summary

• Committed to significant spending to reform social care and constrained by fiscal rules, the new government is reported to be considering a wide range of tax reforms

• A property tax to replace council tax and stamp duty, wealth taxes and capital gains reform all appear to be in the frame

• There are no easy options, however, and each poses significant challenges and risks

• The best idea may be to rethink the increasing reliance on a narrow band of taxpayers and start looking at broadening the base

Chancellor John Healey has promised a Budget “built on fiscal discipline”. As well as committing to keep to the previous government’s fiscal rules, the Chancellor and PM have written jointly to cabinet ministers insisting they must stick within existing spending limits even while funding new pledges.

The Chancellor also said he was keen to give businesses and families stability to plan for the future. That would be welcome, and the CBI head has warned against a summer of speculation and the “kite flying” seen before previous Budgets, adding to uncertainty.

On the last point, at least, it’s fair to say we may already be disappointed, however. Speculation about what taxes may rise is already rife. In part, that’s because of spending commitments and tax cuts already announced, such as business rates cuts for pubs and VAT cuts for electricity bills. Pledges in Andy Burnham’s first week as PM add up to £1.5 billion, but his commitment to overhaul social care could cost more than ten times that - £18.5bn by 2035, the Health Foundation has estimated.

It’s also because of the state of the public finances. At the Spring forecast in March, Rachel Reeves still had over £20bn of headroom against her fiscal rules, but that was before the war in Iran. Debt interest payments are high, the government has committed to raise defence spending to 3.5% of GDP, and Burnham has committed to keep to previous promises not to raise income tax, national insurance or VAT.

Faced with tough choices, speculation about potential tax rises has focused on three key areas.

Burnham himself can be blamed in part for the speculation that the government might seek to replace council tax and stamp duty with a new land or property tax. Last month he told the BBC’s Laura Kuenssberg that there were “big decisions” to be made on the former after criticising the existing system as unfair. He previously voiced support for replacing both, arguing for it as long ago as the 2010 Labour leadership election. More recently, he made council tax reform a key part of the Makerfield byelection that brought him back to Parliament.

He’s not alone. With council tax based on 1991 valuations and stamp duty criticised for making the market less efficient, critics have long called for change. A land value tax (the alternative supported by Burnham) would see an annual charge on the market rental value of land; a property tax, similar but based on the value of property.

The arguments put forward in favour of such a change are that they encourage greater mobility and more efficient use of housing and property. Both would eliminate barriers to downsizing and rather encourage it, supporters argue, and a land value tax would also discourage developers from land banking.

Against it is that it would be a massive change that could take three to five years to implement. Valuations alone would be a huge undertaking. There would also be some quite dramatic winners and losers. Dan Neidle at Tax Policy Associates, who supports the change, notes that North East and coastal towns could see their rates plummet while prime London properties could see tax soar.

Given those buyers losing out will already have paid stamp duty, the government would need to address legitimate complaints over fairness, too. Interim and transitional measures would be needed, he argues. What would happen in such circumstances to the high-value council tax surcharge announced in the last Budget and coming in from April 2028 is unclear.

A wealth tax now seems a perennial point of speculation in the run-up to the Budgets, and the arguments against it are well worn, but bear revisiting. The most detailed investigation of the issues came from the Wealth Tax Commission report of 2020, and the arguments haven’t significantly changed.

The commission concluded that an annual wealth tax was a “non-starter” in the UK, creating vast administrative challenges, and requiring effort better spent on revising existing taxes on wealth instead. It would also likely lead to significant behavioural changes, making its impact uncertain.

Elsewhere, the history of wealth taxes is not a happy one. While some countries, such as Spain, Norway and Switzerland have them (although in place of inheritance tax in the case of Norway), many others have tried and given up. As the IFS puts it, “International experience of annual wealth taxes is not encouraging: They have been abandoned in most of the developed countries that previously had them.”

However, the commission also considered that a one-off wealth tax, levied on individuals’ net assets with few exemptions and introduced without warning. This could work, it concluded, and raise substantial funds: one-quarter of a trillion pounds over five years. However, the necessary pre-conditions were a) it being an “exceptional response to a particular crisis” and b) it being genuinely imposed, and seen to be imposed, as a one-off.

Even a one-off tax will pose significant challenges, however, taking the valuation challenges associated with property and land value taxes and multiplying them. Persuading wealthy and internationally mobile individuals that it is a one-off may prove difficult, too. With the UK having already eliminated its non-dom regime, fears that a one-off wealth tax could be repeated a few years down the line would risk the UK becoming increasingly unattractive as a base for the wealthy.

Perhaps the most likely change, however, is to capital gains tax.

Former Labour leader Lord Kinnock is among those supporting a rise in CGT to equalise the rates (usually 18% and 24% for basic rate, and higher or additional rate taxpayers, respectively) with income tax (20% and 40/45%). First Secretary of State Louise Haigh, a key Burnham ally, and Defence Secretary Wes Streeting are also among those who have made the case for such a move.

As well as arguing that it would be fairer to tax income and capital gains alike, proponents also say it could bring in significant extra revenue. Lord Kinnock calculates it would boost the tax take by £12bn a year, more than half as much again as the £20.3bn the Office for Budget Responsibility estimates CGT will have raised in 2025/26.

However, most commentators take the opposing view. Capital gains tax revenue is particularly susceptible to behavioural changes since it can easily be avoided by simply not selling or gifting the asset. Moreover, relatively few people pay it (378,000 taxpayers in 2023/24), and just 1% of these account for 40% of CGT income. Not many have to defer sales to impact the result dramatically. Historically, CGT receipts have proved volatile, and HMRC’s own “ready reckoner” that attempts to estimate the impact of tax changes on revenue, suggest any increase over 1% would result in a reduced tax take.

It’s not just CGT revenues that are vulnerable, either. A hike in CGT would encourage those with capital to sit on it and generate passive income while discouraging investments that are essential to the growth that the government and country badly need.

A rise in CGT isn’t necessarily incompatible with encouraging growth, however. The Chancellor could, for instance, distinguish between short-term and long-term investments, as in the US, where gains on assets held for a year or less are taxed as ordinary income, but long-term investments benefit from better rates. This would effectively provide some recognition of the inflationary element of gains on longer held assets, absent since indexation relief was abolished in 2008.

It could also restore some of the reliefs for business owners, such as business asset disposal relief (£1m of lifetime gains at 18%), which replaced entrepreneurs' relief (which peaked at £10m of lifetime gains at 10%) . That in turn replaced the more generous still business asset taper relief (which peaked at unlimited lifetime gains at 10%).

If they got it right, there may be an opportunity to both boost revenues and encourage investment. It’s a delicate balance, though, and the outcome is highly uncertain. It’s also perhaps worth noting that Andy Burnham was Chief Secretary to the Treasury in 2008 when Labour introduced the lowest CGT rates on record at 18%.

These aren’t the only options, of course. An exit tax is another idea that seems to do the rounds before every recent Budget. Like a one-off wealth tax, it’s a measure that would need to be introduced without warning, but even then, like the others, it’s not without risks. It could easily drive wealth creators to leave earlier in their wealth creation cycle and make the UK a less attractive draw for inbound investment.

More fundamentally, it reinforces a key weakness in the UK’s personal tax regime: the ever-increasing reliance on a small number of high earners and wealthy individuals, shrinking the tax base. Those with the broadest shoulders are already carrying by far the greatest burden of increasing taxes and have done for years.

If we accept that the tax burden must continue to rise, the government may be better off looking to broaden that base. Smaller (and simpler) rises on a far larger population could generate real and more certain revenue, without so much risk of undermining growth.

As we’ve noted, Burnham’s decision to commit to the previous government’s promises on income tax, NI and VAT ties his Chancellor’s hands a little in this respect. However, some of the kites flown to date are compatible with this approach: For example, proposals for a flat 10% inheritance tax charge on all estates with very limited reliefs, or a 1.8% social insurance “levy” on income, are both being considered by the Treasury, according to reports.

The first would radically expand the proportion of estates that pay inheritance tax (just 4.7% in 2023/24), while the second would apply to all workers aged over 34 and to income over £6,240 (well below the £12,570 personal allowance).

Of course, these are far from problem-free either. It may be hard to secure public support for an IHT change that would benefit the richest estates at the expense of the vast majority of the population, for instance. Likewise, it could be difficult to convince voters that a levy does not break the spirit if not the letter of the pledge not to raise income tax.

Ultimately, the decisions taken are likely to be as much about politics as economics – and there’ll be a price to pay on both fronts if the government gets it wrong.

Approval code: PCTSTT082647