UK government weighs tax rise options as spending pressures mount

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UK considers tax rise options

Highlights

Labour's 2024 manifesto pledges not to raise income tax, national insurance, or VAT, limiting new government's main tax options despite mounting fiscal pressures.
Corporation tax increases are ruled out, though HMRC estimates £21 billion is underpaid annually, prompting focus on capital gains tax and smaller levies targeting wealth or property.
Tax take as share of GDP is at post-WWII highs, with IMF advising spending reprioritisation and IFS warning that proliferation of narrow taxes risks economic distortion.

Tax choices constrained by manifesto pledges

As reported by Reuters, Prime Minister Andy Burnham says he may ask people to pay a little more in tax while keeping the fiscal rules of finance minister Rachel Reeves, which require day-to-day spending to be covered by tax revenues within three years.

Those constraints narrow the government's room for manoeuvre. Labour's 2024 pre-election manifesto rules out rate increases for income tax, national insurance and value-added tax, which together generate nearly two-thirds of total tax revenue, and Burnham also backs that position.

That leaves other levers under discussion. Corporation tax raises 9% of revenue, but Labour has pledged not to increase its rate, even as the tax office estimates that 21 billion pounds a year is underpaid, mostly by small and medium-sized businesses. Capital gains tax is seen as a possible target after Burnham previously said Britain overtaxes labour and undertaxes wealth, while council tax, stamp duty land tax, fuel duty and alcohol duty remain among the other potential areas for change.

Revenue pressure and economic trade-offs

The backdrop is a tax take that is already high by historical standards. Tax as a share of economic output is forecast to rise to its highest level since just after World War Two, above levels in the U.S. and Japan but still below some large European economies with more generous state pension systems.

External and domestic policy voices are also shaping the debate. The International Monetary Fund says last week that the government should reprioritise existing spending before raising taxes further, while the Institute for Fiscal Studies warns that relying on narrow or highly specific levies can create economic distortions.

Research by former tax lawyer Dan Neidle shows British governments have often preferred adding smaller taxes instead of lifting broad-based ones, with 14 introduced since 2020. That approach takes the number of taxes on the statute book to its highest level in 200 years, underlining how difficult it is for any government to raise meaningful revenue without broader tax changes.

Our earlier report on Andy Burnham becoming UK prime minister outlined the leadership handover after Keir Starmer’s resignation and the immediate focus on how Burnham’s agenda could shape fiscal policy. We noted that investors were watching for signals on spending discipline and potential tax changes, with speculation ranging from council tax and inheritance tax reforms to a bigger state role in sectors such as energy and transport.

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