Is Labour's £40bn tax grab enough?

Chancellor Rachel Reeves used her first Budget to wring £40bn from taxpayers and businesses, a raid she argues is necessary to fix the broken NHS, restore public services and fill a £22bn black hole in the nation’s finances.

Investors, businesses, entrepreneurs, landlords, families and private sector pension savers had been braced for a painful attack on their assets, investment gains and earnings. Yet, thankfully, with regard to certain tax reliefs and allowances, the day was less brutal than had been expected. Labour appeared to be testing the waters in the weeks leading up to the Budget to gauge response to some of its more draconian proposals and its plans to increase government borrowing levels. Clearly the chancellor had listened. 

Assaults on private sector pension tax relief and a proposal to make employers pay NI on contributions into employee schemes were jettisoned following a furious outcry over the damage this would do, and the increasingly unfair treatment of private sector pensions compared to public sector equivalents. 

There was relief that business relief on Aim shares, widely predicted to be at risk, was not stripped away entirely. Investors will receive only 50 per cent inheritance tax (IHT) relief on qualifying shares held for at least two years from April 2026. Although the change is disappointing, as a better than expected outcome it was welcomed by many who had predicted a huge drop in Aim share prices as investors reconsidered the risk of holding them. That would have left companies vulnerable to takeovers and worse, and pain for their employees holding shares. But with the benefit of supporting growth companies watered down, investors may be less willing in future to take this risk into their portfolio – it certainly makes the market less attractive than it was before.

The IHT threshold too was left alone (albeit frozen until 2030); the residence nil-rate band remains in place and the rate of tax charged left unchanged. Protection for assets passed on at death from capital gains tax on top of IHT has not been dismantled, and existing gifting arrangements were also spared.  

But it wasn’t all plain sailing on the IHT front. From April 2026, previously exempt family-owned business and agricultural assets worth more than £1mn – a fairly paltry amount – will be subject to a 20 per cent rate of IHT on values above £1mn. For these families succession planning will now be fraught with worry, and their exposure to a 20 per cent tax following the death of their owners will be disastrous for many of them. Pension pots will be included in estates for inheritance tax purposes from April 2027.

Think-tanks who urged the chancellor to cut the amount people can draw from their pensions tax-free, from £286,275 to £100,000 (arguing that this would have generated £2bn a year), will have been disappointed. But the one in five retirees likely to be affected certainly won’t be. The truth is the tax gain for the government was probably never going to be worth the pain inflicted on these working people who had saved hard all their lives. However, many people were panicked into crystallising their pots ahead of 30 October in fear that their retirement plans were about to come crashing down around them.

In other aspects this Budget was a battering ram, particularly on businesses whose national insurance costs are set to jump steeply, and for investors who face significant rises in capital gains tax liabilities. The increase in national insurance for employers from 13.8 to 15 per cent, coupled with the lowering of the threshold for payment to just £5,000, will cost them £25bn annually by 2029/30 and may make bosses reluctant to expand their workforces. Investors who crystalise gains on their investments face new higher rates of CGT with rates rising immediately to 18 (from 10) per cent and 24 (from 18) per cent, aligning with the rates applied to non main-residence property sales. 

Britain is now firmly in the high-tax, high-spend category. Labour’s argument is that low taxes are not compatible with properly functioning public services. This may be so, but it’s where the burden falls and the risk of far-reaching consequences that led to such critical questioning of Reeves’ strategy ahead of the Budget. The government's choice to target back-door and less visible tax rises have the potential to cause serious economic harm and to catch many a finger in the most painful way. 

More worryingly, the billions raised through the tax changes and increased borrowing in this Budget are unlikely to be enough to achieve all of Labour’s ambitions, which also rely on big public sector productivity gains. The strong likelihood is that Reeves will come back for more.