UK PM Andy Burnham's tax agenda: SDLT reform, the 50p rate or even a wealth tax?

The replacement of the Prime Minister between election cycles is commonplace in the UK parliamentary system. Five of the UK's six most recent PMs took over from the incumbent following an internal party election process, rather than a general election. It is, however, much less usual for an individual who is not already a Member of Parliament to fight a by-election with the specific objective of being installed, unopposed, as the head of government.

Whatever one's views on this process, an obvious drawback of it is that the new Prime Minister has not had the opportunity of a general election campaign, or many years in opposition or even as a recent MP, to develop and communicate to the public his policy objectives for office.

Will Andy Burnham stick to Labour's manifesto pledge?

The question of whether Andy Burnham will treat himself as bound by the pledges made in the Labour Party's last general election manifesto seems to have been answered in the affirmative by deputy leader Lucy Powell last Sunday, who said he would stand by those promises but be 'bolder' in what he tries to achieve.  On tax, the Labour Party committed in its election manifesto not to increase National Insurance, the basic, higher or additional rates of income tax, or VAT.  Of course, Rachel Reeves did increase employer National Insurance contributions, along with various rates of income tax for dividends, interest and other types of income (other than earnings and pensions), which would appear to many observers to already be an obvious breach of that commitment.

With the installation of John Healey as Chancellor of the Exchequer (edging out Ed Miliband and Shabana Mahmood, who had both been widely tipped as probable appointees), some commentators have suggested that Burnham is looking to maintain a strong influence over fiscal policy.

It will be some months before the Treasury's next fiscal event.  So, what tax changes may be on the horizon?  Here are some areas to keep on eye on in the coming weeks.

Changes to watch out for:

Performative tinkering

In reality there is little room for manoeuvre in advance of the Autumn Budget and in the short term the new PM is limited to tinkering around the edges of the tax system with the aim of further distancing himself from Starmer and garnering some positive headlines.  

In this vein, VAT will be cut on electricity. Currently set at 5%, this will not quite offset the increase in the electricity price cap this month.  A reduction in rates for pubs will also mitigate the impact of the increases that have been seen under Rachel Reeves, but those establishments still face significantly higher costs since the Labour election.

There will no doubt be more similar measures, carefully crafted to generate positive headlines, at minimal cost and which can be implemented during the current honeymoon period.  

More radical reform

Stamp duty land tax (SDLT), having risen from a maximum rate of 4% in 2003 to 17% in 2026, appears to no longer be having its day and its abolition has been floated by a number of political parties.  The question is how to recoup the £14bn that it raises.  Burnham has been a consistent supporter of the proposal to replace SDLT and Council Tax with an annual levy (referred to often as a 'land value tax').  We commented on the prospect of a land value tax in a recent article.  Reform itself would be highly complex and take time to implement but may be seen as worth it for the potential beneficial effects it could offer for the housing market (for example, removing the financial disincentive for older people to downsize).  We will likely need to await the Autumn Budget to see if Burnham has the political will to push this through, but it may well be an idea for the next Parliament.

A return to the 50% additional rate of income tax?

Burnham has also said historically that he sees a case for raising the additional rate of income tax, currently 45% on earnings over £125,140, to 50% (or 52%, when you factor in National Insurance contributions).  The UK last had a 50% rate between April 2010 and April 2013, at that time on incomes over £150,000 (which, on the basis of the Bank of England's inflation calculator, was the equivalent of between around £216,000 and £238,000 in today's terms, depending on the year measured from).  The experiment with a 50% rate raised one third of the amount initially hoped for and its abolition in 2013 came at an expected cost of £100m a year, or somewhat less than the cost of capping national bus fares at £2.

If it were to come this Parliament, the 50% rate might be introduced as an entirely new 'band' so as to be capable of being presented as not breaching the manifesto commitments on income tax rises.  This would be a material increase in tax on higher earners and may well lead to undesirable behavioural responses, whether in the form of reduced working hours or outright expatriation (which, it might be hoped by now, will no longer be treated by the government and certain commentators as a myth). Previously, a lot of time and effort was spent by high earners in seeking to mitigate the impact of the 50% rate, be it accelerating income receipts or looking to generate capital receipts instead of income, and so there may be a repeat of this.  On the whole such behavioural responses have not been seen in respect of the 45% rate.

Could capital gains tax rates rise?

Burnham has previously expressed the view that labour is overtaxed and wealth undertaxed, which may indicate an intention to increase the rates of CGT to be closer to, or even align with, those of income tax.  The higher rate of CGT is currently 24%.  It is commonly said that some type of indexation allowance would need to be introduced with any increase in CGT rates.  While this may make intuitive sense, indexation allowance would plainly reduce the very tax receipts which the Treasury would be seeking to increase by raising the rates of tax.  It will be interesting to see how this tension may be dealt with in practice.

A UK wealth tax?

Despite the universal experience of other countries who introduced a wealth tax being that they don't work, the PM may also be politically attracted to a wealth tax in the form proposed by the latest darling of left-wing economists Gabriel Zucman, of 2% annually on assets of £100m (reported on again recently in the Guardian).  A number of commentators, with varying degrees of actual subject-matter expertise, have been pushing the idea of a wealth tax and it has traction in some Labour circles.   Historically most wealth taxes that have been introduced been subsequently withdrawn, having failed to raise significant revenue and had the deleterious effect of causing many wealthy individuals to pack up and leave, as is currently being seen in California, appears to be of limited interest to those with a strong political motivation for introducing one.  They are also unusual in countries with rates of inheritance tax as high as they are in the UK. The widely reported departure of many high-net-worth individuals from the UK following the abolition of the remittance basis regime and radical reform to the taxation of offshore trusts should give the government pause.

Perhaps the way forward will be to embrace the replacement of SDLT and Council Tax referred to above with a land value tax, which is a wealth tax in all but name, and to use this in the same way as governments have used SDLT since 2010 – progressively increasing rates to raise additional revenue until it becomes unsustainable.

An early U-turn on the personal allowance

There are already signs that the PM is having to pay heed to fiscal and economic reality.  After saying he will 'look at' the income tax personal allowance (currently £12,570, where it has been frozen since April 2021) – leading to speculation of an impending increase in the tax-free amount to support lower earners – it was today reported that within barely 24 hours the PM is already pulling back.  We can only speculate at this stage as to the reason for this early U-turn  but it may just perhaps be the case that Burnham is already experiencing what happens when suggestions of fiscal largesse collide with the hard reality of managing the public finances.

We will, of course, keep this under review, but taxpayers should expect speculation about policy changes to increase markedly, as is tradition, as we move into the autumn.