Yesterday's pre-Budget speech by Chancellor Rachel Reeves was a scary listen, not in terms of what was said but the whopping elephant in the room.
It’s hard to criticise Ms Reeves for wanting to reduce NHS waiting lists, cut the cost and amount of government debt and alleviate the pressure on household finances caused by high energy and food prices.
And we all hope she will put the economy back on the straight and narrow by paving the way for major investment in the country’s ailing infrastructure.
But not a word was muttered yesterday about how she will fund these grandiose plans (yes, the elephant in the room).
Not in her turgid speech, nor afterwards in answers to questions from reporters. She remained schtum other than to say: ‘I will do what is right.’
It’s now obvious we are being softened up ahead of a wall of taxes crashing down on our finances and wealth. A tax grab that could match last year’s £40billion Budget haul, much of it taken from businesses.
The gory detail will be laid before us in the Budget in three weeks’ time. But most of us will get clobbered.
Based on details gleaned from informed sources and financial experts, we identify the likely Budget losers.
Employed workers
It is now clear that most workers will face a hike in income tax come April next year. This is despite a manifesto commitment made by Labour not to raise income tax rates, VAT or National Insurance (NI).
The Chancellor will pursue this path because she has boxed herself into a corner. Having hit businesses with rocketing NI bills, she can’t go back to them for more tax revenue without derailing a fragile economy.
As a result, she has to raise tax from households. A hike in VAT would be inflationary and anti-business.
This leaves income tax and NI as big sources of extra tax revenue. To deflect criticism, she will box clever.
Two approaches are being considered. The first is to steal an idea from the Resolution Foundation, a socialist think-tank.
It involves a 2 per cent increase in income tax rates. So, the current basic, higher, and additional rates of 20, 40 and 45 per cent would be notched up to 22, 42 and 47 per cent.
But for employed workers, these increases would be offset by a 2 per cent NI cut. In other words, they would be no worse off, allowing the Chancellor to stand up on November 26 and argue that she hasn’t really broken the manifesto commitment.
As I point out later, this would generate £6billion of annual revenue from other groups of people: a sum that most other tax-raising measures will not match.
The second approach, revealed in The Mail on Sunday three days ago, would be more targeted.
It would work as follows. Anyone earning less than £46,000 would be classed as a ‘working’ person and protected from increases in NI and income tax.
Those earning more (7.2million workers) would be defined as ‘wealthy’ and fair game for extra taxes.
The idea is barking mad. For a start, it would hit millions of hard-working middle earners who have never viewed themselves as wealthy.
Many – drivers of trains and HGVs, engineers, police officers, teachers, captains in the Army – will be Labour supporters. They would be apoplectic if they were deemed by Labour as too well off to fit its flaky definition of a ‘working person’.
It would also be messy to introduce. It would require a lowering of the threshold at which higher rate income tax kicks in – from £50,270 to £46,000.
Any increases in higher-rate taxes would also raise peanuts compared to the £6billion of annual revenue that the Resolution Foundation proposal would generate. Yet it indicates those who stand in the Chancellor’s crosshairs.
Pensioners, the self-employed and landlords
While pensioners hope the Budget will bring good news with confirmation of a 4.8 per cent increase in the state pension, Labour could spoil the party.
If it goes ahead with a 2 per cent increase in income tax and a 2 per cent reduction in employee NI, taxpaying pensioners will lose out.
This is because they do not pay NI once they hit state pension age, irrespective of whether they continue working.
Nearly nine million pensioners pay income tax, a number that has grown exponentially since the personal allowance was frozen at £12,570 in April 2021.
Unless Ms Reeves lifts the freeze, a 2 per cent increase in income tax will bite hard into the household finances of many pensioners.
For example, a pensioner with an annual income of £20,000 currently pays £1,486 of income tax. That would jump to £1,635 if they were hit with a 2 pc increase.
Although Ms Reeves said yesterday she is determined to drive down energy and food bills – a big chunk of pensioners’ expenditure – they are mere promises.
Any reduction in employee NI, matched by an increase in income tax, will also hit the self-employed because their NI arrangements are different.
It would also adversely impact landlords who earn income from renting out properties – rental income is not subject to NI.
Professionals
Some 190,000 professionals – lawyers and accountants who have set up their businesses as limited liability partnerships – could also lose out in the Budget.
This is because such business structures enable partners (high earners) to classify themselves as self-employed – therefore avoiding employee NI on earnings.
One idea being mulled over is the introduction of ‘Partnership NI contributions’, which would correct this anomaly. It would also tick a Reeves’ box – that those with the broadest shoulders pay their fair share of taxes.
Owners of high value properties
New property taxes will feature in the Budget. Among those being considered are higher council tax bills for owners of expensive homes.
Council tax is currently charged in bands, from A to H, with homes graded according to their value in April 1991 (an antiquated and ludicrous system). Councils then set bills within these bands, with ‘H’ embracing the most expensive homes.
One idea, from the Institute for Fiscal Studies which Ms Reeves could bite on, is to double council tax bills for the top two bands ‘G’ and ‘H’.
This would take the respective average annual bill to £7,600 and £9,120 respectively.
Those impacted wouldn’t all be income rich. Like many homeowners, especially the elderly, they live frugal lives with the home being their only asset.
Although the money wouldn’t raise funds for the Treasury, it would reduce the need for councils to go to the Government when emergency funding is required.
An annual mansion tax is also on the cards. Ten days ago, The Mail on Sunday revealed that Ms Reeves is planning such a tax on homes worth £2million plus.
The levy would apply to the value of homes above £2million and be levied at 1 per cent. So, someone with a £3million property will pay a £10,000 annual charge – likely to be in addition to their council tax.
Although the tax will impact no more than 150,000 homeowners – and will yield the Treasury little in revenue (maybe £1billion a year) – that’s not the purpose.
It’s class warfare: a tax designed to appeal to Labour’s phalanx of socialist MPs who despise wealth (unless it’s their own).
A swathe of experts have lambasted the tax. Property guru Kirstie Allsopp has been scathing, accusing the Chancellor of viewing the housing market as a ‘shiny piggy bank with the nation’s savings locked inside’.
Its adverse impact on both the housing market and economy would far outweigh the minuscule boost to Treasury coffers.
There are also obstacles aplenty: for starters, finding enough surveyors to identify and value properties likely to be caught by the tax.
Also, what about elderly homeowners who are equity rich but cash poor? Will they be forced to downsize or release equity from their home to pay the annual bill?
The only plus I can see is that the London home of Energy Secretary Ed Miliband, valued at £3.5million, would land the Net Zero zealot with an annual mansion tax bill of £15,000.
