Burnham urged to launch £26bn tax raid on high earners

Chancellor John Healey and Prime Minister Andy Burnhm could raise £26bn by hiking capital gains taxes and applying national insurance to other areas of income, according to plan put forward by academics that will rattle the City and Westminster ahead of this year’s Budget. 

Researchers at the Centre for Analysis of Taxation (Centax), consisting of academics from the London School of Economics and Warwick University, have said reforms raising £26bn would address imbalances in taxes paid by salaried employees and the very highest earners who often have other forms of income.

Centax’s proposals are likely to generate intense debates in Westminster as a smaller fiscal headroom of as much as £15bn could force Healey to consider large tax rises. The Labour manifesto promised not to raise income tax, VAT or national insurance for workers. 

Top economists including Andy Burnham’s former economic advisers Jim O’Neill and Andy Haldane have warned that changes to capital gains and investment taxes could damage growth. 

Centax called for capital gains taxes to be reformed and equalised with income tax rates, which researchers said would raise a further £19.7bn in 2030. 

The paper’s authors argue capital gains, which are taxed at rates between 18 per cent and 24 per cent, enjoyed lighter treatment than income and benefitted “those at the top of the distribution”. The report said removal of uplift at death, the introduction of an investment allowance for a risk-free rate, exit taxes and an “increase in the generosity of the treatment of losses” could improve growth and productivity. 

Reforms should be introduced as a “package”, authors Arun Advani, Helen Hughson and Andy Summers insisted. 

The report also called for employer national insurance contributions (NICs) to be applied on partnership profits at LLPs, raising £2.1bn at the end of the crucial forecast period. 

Class 1 NICs would also be applied to investment income from rent, savings and non-dividend investment income in order to raise another £4bn, according to the report.

System ‘getting in the way of growth’

The proposals seek to address the different levels of tax rates paid by higher earners. Academics found that among the top 0.01 per cent of high earners, just one in ten pays close to the headline rate of 47 per cent while a quarter paid 20 per cent or less. 

The report also emphasised average rates paid by the top one per cent of earners have increased since 2008 yet decreased for the top 0.01 per cent from 37 per cent in 2008 to 33 per cent in 2022.

The researchers also want to address imbalances in tax rates paid by workers in different industries earning the same level of income each year.

Arun Advani, director of Centax and professor of economics at Warwick, said 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.

Its proposal to reform capital gains taxes was first published in late 2024. The findings from the release ahead of Rachel Reeves’ first budget influenced top Cabinet ministers such as Louise Haigh and Wes Streeting, who said capital gains tax hikes represented a “wealth tax that works”. Dale Vince, the former Labour donor and clean energy tycoon, included claims a new tax hike could raise revenue in a proposal sent to the Treasury.

Capital gains tax pushback

Some economists have warned that a hike in capital gains taxes could lead to a fall in revenue due to a change in behaviour by investors. Paul Johnson, the former boss of the Institute for Fiscal Studies, said claims it would increase government receipts were “nonsensical” and could cost the government £3.5bn in lost receipts. 

Robert Salter, director at the tax advisory Blick Rothenberg, said an extension of 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.”

Sean Drury, head of tax at the advisory firm, also said proposed changes would make the UK less competitive than other major economies. Rebecca Williams, financial planning lead at the wealth manager Rathbones, said the government should “tread carefully” when making changes as a push for growth could be undermined. 

The Treasury has been contacted for comment.