Facing rising government borrowing costs driven by ongoing energy supply disruptions, UK Chancellor John Healey is expected to introduce tax increases in the upcoming budget to address the escalating debt interest burden and fund public spending commitments. This comes amid pressure from bond markets and international institutions such as the International Monetary Fund to curb borrowing, as well as the financial challenges inherited from previous administrations.
Healey’s options are constrained by Labour’s manifesto pledge not to raise national insurance, income tax, or value-added tax, which limits increases in the government’s most reliable revenue streams. Consequently, the focus is likely to shift toward targeted tax measures affecting higher earners and other less conventional sources of revenue.
A recent analysis from the Centre for the Analysis of Taxation called attention to the tax treatment of partnership profits, which currently avoid employer national insurance contributions that are levied on employment income. The report highlights that this exemption disproportionately benefits high earners, including professionals such as solicitors, accountants, and management consultants. Data shows that nearly half of all partnership income in 2020 accrued to the top 0.1% of taxpayers, with significant concentrations in affluent areas like Kensington, London. Introducing an equivalent employer national insurance charge on partnership income has been estimated to generate £2.1 billion by 2030, mainly affecting the highest earners and potentially discouraging tax-driven company reorganizations.
The report also advocates for increased taxation on rental income, savings outside of individual savings accounts, and non-dividend investment income to align more closely with income tax rates on employment earnings, potentially yielding around £4 billion. Adjusting tax reliefs on pension contributions for high earners is another option under consideration, though officials warn that speculation of such changes has already caused anxiety among savers, evidenced by a sharp increase in pension withdrawals in recent years.
More extensive reforms, such as overhauling capital gains tax or property tax systems, could raise additional revenue but are viewed as complex and time-consuming endeavors unlikely to feature in the immediate budget.
At the same time, experts suggest that Healey could ease the impact of any new tax measures on higher earners by addressing certain inefficiencies and disincentives embedded in the current tax system. A prominent example is the abrupt withdrawal of childcare subsidies when the highest earner’s income exceeds £100,000. Families earning just below this threshold qualify for 30 hours of free weekly childcare, a benefit worth thousands of pounds, but lose it entirely upon surpassing the limit. This “cliff edge” effect discourages wage growth and workforce participation, particularly among secondary earners, often mothers, who may reduce working hours or leave the labor market.
Researchers note a spike in taxpayers whose declared income clusters just below this threshold, suggesting proactive measures to avoid losing subsidies. With childcare subsidies having been extended to younger children and the threshold frozen, the problem is intensifying, affecting more families each year. While reversing this policy would reduce revenues by an estimated £640 million by 2030, analysts argue the change would promote growth and improve work incentives.
Balancing targeted tax rises on the wealthy with reforms that mitigate disincentives for workforce participation could help Healey present a more economically progressive and growth-friendly budget. Such adjustments may also contribute positively to public and market perceptions at a time of heightened sensitivity to fiscal discipline and economic stability.