The chancellor has a opportunity to boost the public purpose and deliver redistribution
Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.
On 26 November the UK’s Labour Government led by Sir Keir Starmer will present its second budget since the July 2024 general election. What might it do or not do?
A priority is probably to restore the government’s flagging fortunes. In seventeen turbulent months in office it has made poor policy choices. It antagonised the old, poor, sick and disabled by cutting the winter fuel payments to retirees, continuing with the Tory two-child benefit cap and imposed disability benefit cuts. It was mauled in the May 2025 local council elections, by-elections and is doing badly in opinion polls. It has faced backbench rebellions in parliament and has been forced to row back on winter fuel payment and disability benefit cuts.
The bruised government wants to change the narrative. So, the budget will offer some concessions. These are likely to include ending the two-child benefit cap, a major cause of child poverty as no Labour Prime Minister wants to be remembered for increasing child poverty. This policy would cost between £3bn and £3.6bn a year.
The government can help the poorest households by abolishing VAT on domestic fuel which could save average household between £86 and £90 a year, and cost around £2.5bn a year.
The government ought to increase the tax-free personal income tax allowance, currently at £12,570 since 2021-22, to provide relief. The cost of increasing personal allowance by £1,000 is around £8.4bn a year though the gains would be felt disproportionately. Basic rate tax payers may save £200 a year; higher rate (40%) taxpayers £400; and the additional rate (45%) taxpayers £450 though due to clawback of personal allowances those earning more than £100,000 may receive little or nothing.
Frozen income tax allowance and thresholds have forced more people to pay income tax. In 2021-22, 33m individuals paid income tax, rising to 39.1m for 2025/26. The number of individuals at or above the state pension age paying income tax has increased from 6.74m in 2021/22 to 8.72m in 2025/26. By April 2026, when the next 4.8% triple-lock increase kicks-in, the new state pension (not received by all pensioners) could be £241.30 per week. Lots more pensioners will become liable to pay income tax. That will go down badly with people who are habitual voters. So, in its self-preservation mode, the government may well increase personal allowance and increase the basic rate of income tax threshold. Currently, the basic rate of 20% is payable incomes between £12,571 and £50,270.
Beyond that the government has constrained its options with rash pre-election promises. Before the 2024 general election Labour said that it “will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT”. Its manifesto pledged to “cap corporation tax at its current rate of 25%”. In November 2024, after the backlash on increasing employers’ national insurance contributions, the Chancellor made another rash promise and said that she is “not coming back with more borrowing or more taxes“. Of course borrowing has increased since 2024. Now the Chancellor faces the choice of spending cuts and thereby plunging more people in poverty, increasing NHS queues and worsening infrastructure and economic growth, or tax rises. She can navigate a course.by pushing a particular definition of “working people” (see above). In addition she also has the choice of adjusting government borrowing and/or creating money as Modern Monetary Theory (MMT) suggests. She can cut corporate subsidies too.
The government can save over £20bn a year by stopping payment of interest on commercial banks’ central bank reserves. This policy was implemented after the 2007-08 banking crash to improve liquidity, effectively subsidising banks. Things have moved on since then and banks are awash with profits and cash. Since 2023, the European Union has mostly stopped paying interest on central reserves. The UK must do the same.
The government can borrow for investment in infrastructure and new industries. This is infinitely cheaper than the Private Finance Initiative. The UK public debt is around £3,058.9bn or 95.3% of gross domestic product (GDP). This includes £558bn of the residue of quantitative easing. This isn’t really a debt as it represents transactions between the Treasury and the Bank of England; both are arms of the state. Its exclusion would reduce the debt to around 75% of GDP. In comparison, the post-war construction of the UK was facilitated by government debt of 270% of GDP. The direct state investment in infrastructure, new industries and revival of oil, gas, electricity, water and transport brought prosperity and by 1976 debt was reduced to 49% of GDP.
There are huge anomalies in the tax system. Currently, capital gains are taxed at marginal rates of 18% to 32%. In contrast, wages are taxed at marginal rates of 20%-45%. Some 378,000 people, majority are in London and the Southeast of England, benefit from lower capital gains tax rates. Their effective average tax rate is 18.36% which is lower than the basic rate of income tax. By taxing capital gains at the same rates as wages, around £14bn extra could be raised. Billions more can be raised by levying national insurance on capital gains.
Dividends are taxed at marginal rates of 8.75%, 33.75%, and 39.35%. Unlike wages no national insurance is levied on dividend income. Aligning taxation of dividends with wages could raise £6bn billion a year. Even higher if national insurance is also charged.
There is a case of charging higher rates of tax on passive income or income from wealth. This used to be called investment income surcharge and was levied at the rate of 15% between 1972 and 1984. The reintroduction of a 15% income surcharge on income exceeding a certain amount, for example £5,000, on dividends, rental income, capital gains and more and could generate £18bn a year.
In 2023/24, the government handed out £78.2bn tax relief on pension contributions. Only around a third went to 29.2m basic rate taxpayers. The remainder went to just under 7m higher and additional rate taxpayers. By restricting tax relief at the rate 20% to all, the government will have £14.5bn spare.
Employers, whether companies or partnerships, pay national insurance on employee earnings. However, that does not apply for partners who take share of profit instead of salaries. This anomaly saves the partners around £138,000 for every £1m of profit shared. Because of the partnership structure the big four law firms in the City of London avoided paying £4bn of employers’ national insurance. Add to those accountants, architects and surveyor operating through partnership structures and the potential for raising additional revenues is huge.
Currently, someone living in a home worth £320,000 or £32m falls into the same council tax band. A progressive reform should see additional bands to ensure that wealthy pay more. As expensive properties tend to be in affluent areas, the additional council tax would go to comparatively better-off local authorities. This should be countered by reducing central government grants to better-off councils and increasing grants to poorer areas.
The main rate of corporation tax is 25% for companies. A 1% increase in the main rate can generate £3.6bn. There are two issues with corporation tax: i) tax rate; and ii) tax base. The base is the amount on which tax is levied. It is reduced by numerous reliefs and allowances, most of which are poorly monitored. The government could remove allowances which are abused. The cost of the Research and Development (R&D) relief has grown from £1.1bn in 2010 to £7.5bn in 2023, with estimated losses to fraud and error totalling £4.1bn since 2020. Leading football Clubs are claiming R&D relief on the time players and staff spend on nutrition and data collection projects i.e. chefs cooking different foods and players trying them. James Bond movies are made and marketed through a labyrinth of opaque offshore entities. The UK government subsidises their production, but most of the profits are booked in offshore tax havens. So, the government could abolish some tax reliefs thereby increasing the tax base on which corporation tax is levied.
The above is not an exhaustive list but the government has numerous policy choices for boosting the public purse and redistribution. The few suggestions above tackle perks for a select few, anomalies and abuses. They do not increase National Insurance rates, the basic, higher, or additional rates of Income Tax, VAT rates, or the headline corporation tax rate. More importantly, they do not hit the bottom 50% of the population, and thus help to reduce inequalities. The above proposals also curb tax avoidance. For example, the alignment of taxes on dividends and capital gains with income tax on wages nullifies tax avoidance strategies and prevents the drain of graduates to parasitical industries.
Image credit: Kirsty O’Connor – Creative Commons
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