These are the taxes that Reeves will raise under the Budget

Not much will happen to Reeves in the next Budget, but here’s what to expect: a gambling tax, a windfall tax and an income tax national insurance exchange, says Tim Sarson

I remember the good old days of Budget predictions. We usually think about two weeks before the event, create a blog and end it with some speculation about what will happen this year.

The budget prediction season started early today. The decorations were put up at the end of August. But no one expected much reward. There will be very few, if any, rabbits on November 26th. There will be a tax increase.

As fiscal events approach, my KPMG tax policy team gathers to think about what might happen on the day, and what we should tell our clients. We are not political experts. Instead, we put ourselves in the shoes of a Treasury official faced with the government’s current financial position. Only after we analyze the numbers, tax by tax, and test ideas with technical experts, do we add a little political judgment to our predictions. OK, maybe more than a pinch.

Here are the top stories from this year’s Budget meeting:

First, the key dynamics: there is a sizeable fiscal gap to be filled, say at least £20 billion in the third year of the forecast. There is a new policy team led by former Resolution Foundation head Torsten Bell. This is against a backdrop of a difficult world economy with unpredictable tariffs, high inflation and major changes in international tax competition. And, finally, Labour’s 2024 manifesto rules out raising taxes which together account for around three-quarters of UK income.

The government has a choice: broaden the tax base; the government could introduce new taxes, as has been done with the health and social services levy; or he could tinker in the little things, as was the case for most of last year.

There are two steps that seem unavoidable. Freezing personal tax thresholds has become as much a Budget Day tradition as freezing fuel duties. Extending the freeze until 2030 would generate more than £10 billion in revenue for the government according to the Institute of Fiscal Studies (IFS). I expect the government will take advantage of efforts to tackle tax evasion and evasion and close the tax gap. Yes, the tax gap is historically low and rates of return are decreasing, but the gap for small companies has ballooned. Investing in law enforcement could generate several billion more dollars. Both actions are considered to broaden the base.

I still wonder if Reeves will try another favorite budget, and target some taxes at a sector that appears to have done well due to factors outside his control. The latest example of this is oil and gas producers and energy generators at the peak of the price spike resulting from the Ukrainian War. With the chances of further taxing North Sea energy diminishing, the banking sector may be the Treasury’s next target. Changes to the banking surcharge or bank levy, or a “windfall tax” on profits made from the Bank of England’s Quantitative Easing may appear likely. But Reeves’ recent statements suggest he may be pushing back against short-term policies because of long-term concerns about our competitiveness as a financial center.

Gambling with state finances?

There’s been a lot of fuss about gambling taxes too. An increase in one or more of the various duties paid by punters or gaming operators seems close to success, which is politically a safe option.

My big predictions are income tax and National Insurance (NI) exchange. I’ve been pondering this for a while and bringing it up with clients. Their reaction was neutral at best. So, when the Resolution Foundation came up with a proposal exactly like this, I thought, “right, this is happening.” Raising the base rate and the higher rate of Income Tax by two per cent while reducing employees’ National Insurance Contributions (NICs) by the same amount is a breach of the manifesto commitment, but you could argue that it does not impose any more taxes on “ordinary workers”. However, what it does do is increase revenues by several billion by broadening the tax base, as landlords, investors and pensioners pay income tax but not NI. This pleases think tankers who generally dislike NI.

If the Chancellor really wants to eliminate the fiscal gap, he could announce an income tax and NI swap as the start of a process. Each year the rate will rise and fall by two percent, until the employer’s NI no longer exists.

If the Chancellor really wants to eliminate the fiscal gap, he could announce an income tax and NI swap as the start of a process. Each year the rate will rise and fall by two percent, until the employer’s NI no longer exists. In the third year of the forecast, which is a crucial year for our fiscal rules, this will increase revenues by £18 billion.

If they do this, you can ignore the kites being flown to provide NI to landlords, or for pension contributions. Rate exchange was successful.

Especially? Many changes usually occur. But I’ll end with some final predictions about things that won’t happen. Cashing out the fuel duty escalator, which is properly kept on the Treasury’s books every year until it is released in the shipping box.

Wealth tax does not occur. In the real world, this is complicated, doesn’t have much impact, and sends unhelpful international signals. VAT rates will not increase despite the recent uproar. This would be Inflation, and a clear violation of the manifesto. Long overdue root and branch reform of the property tax system will have to wait. And new incentives to increase our competitiveness in investment will emerge, but not this year.

Tim Sarson is head of tax at KPMG