Chancellor John Healey and Prime Minister Andy Burnham could raise £26bn through sweeping reforms to capital gains taxes and national insurance contributions, according to a new academic proposal.
Researchers at the Centre for Analysis of Taxation (Centax), drawn from the London School of Economics and Warwick University, published the plan ahead of this year’s Budget.
The proposals are designed to address imbalances between taxes paid by salaried workers and the very highest earners, who often derive significant income from non-employment sources.
Centax is calling for capital gains taxes to be equalised with income tax rates, a reform researchers claim would raise an additional £19.7bn by 2030.
Currently, capital gains are taxed at rates between 18 per cent and 24 per cent, which the report’s authors argue benefits “those at the top of the distribution” compared to ordinary income tax treatment.
The paper’s authors, Arun Advani, Helen Hughson, and Andy Summers, insisted the reforms should be introduced as a “package” rather than implemented in isolation.
Among the top 0.01 per cent of earners, just one in ten pays close to the headline rate of 47 per cent, while a quarter paid 20 per cent or less, according to Centax’s findings.
The report also found that average rates paid by the top one per cent of earners have increased since 2008, yet decreased for the top 0.01 per cent, falling from 37 per cent in 2008 to 33 per cent in 2022.
The plan also calls for employer national insurance contributions to be applied to partnership profits at limited liability partnerships, which researchers estimate would raise £2.1bn over the forecast period.
Class 1 NICs would additionally be extended to investment income from rent, savings, and non-dividend investment income, raising a further £4bn under the proposals.
Arun Advani, director of Centax and professor of economics at Warwick, argued the changes would encourage workers to be more productive rather than “chase low rates.”
“While we don’t take a view on what the government should do with any additional revenue raised through these reforms, not doing them means limiting growth while having to raise the same money elsewhere,” Advani said.
The proposals are likely to generate fierce debate in Westminster, particularly given that a shrinking fiscal headroom of up to £15bn could pressure Healey into considering significant tax rises.
Top economists including Andy Burnham’s former advisers Jim O’Neill and Andy Haldane have previously warned that changes to capital gains and investment taxes risk damaging economic growth.
Paul Johnson, the former boss of the Institute for Fiscal Studies, has said claims that higher capital gains taxes would increase government receipts were “nonsensical” and could cost the Treasury £3.5bn in lost revenue.
Robert Salter, director at tax advisory Blick Rothenberg, warned that extending NICs to self-employed partners “could be quite controversial.”
“If such a charge were introduced, one could argue that the UK would actually be taxing self-employed partners more punitively than employees, who aren’t actually ever liable to employer NICs,” Salter said.
“Rather, the employer NIC charge for employees is purely the responsibility of their employer and is not borne — at least directly — by individual employees, though these employer NIC costs may on occasion impact what a company is willing to pay its employees,” he added.
Sean Drury, head of tax at Blick Rothenberg, said the proposed changes would make the UK less competitive against other major economies, raising further concern about the reform package’s broader economic impact.
Rebecca Williams, financial planning lead at wealth manager Rathbones, said the government should “tread carefully” when making changes, warning that a push for growth could ultimately be undermined by poorly calibrated tax reform.