Ministers are reportedly exploring a proposal to increase capital gains tax to help fund a £20 billion plan to raise the income tax personal allowance. The initiative, supported by the prime minister and Chancellor John Healey, follows a suggestion from Dale Vince, a Labour donor and founder of the green energy company Ecotricity, to align the capital gains tax rate with the 45 percent top rate of income tax.

The plan aims to increase the personal allowance by £3,000 to £15,570, bringing it closer to the level it would have reached had it not been frozen since 2021. According to research conducted by the National Institute of Economic and Social Research (NIESR) and commissioned by Vince, this adjustment could provide the lowest 20 percent of earners with an additional £600 annually. The overall cost to the treasury is estimated at £20 billion.

Approximately £14 billion of the revenue needed would come from raising capital gains tax, with the remaining funds projected to be raised through ending interest payments on Bank of England reserves, according to reports. The measure is part of a broader focus on easing the pressures faced by households amid rising inflation linked to international events such as the war in Iran. Andy Burnham, a prominent Labour figure, has pledged to lead a government focused on alleviating the cost of living challenges for families.

Vince has argued that for years, lower-income groups have been squeezed while wealthier individuals, particularly through capital gains, have been taxed less heavily than income from work. He described raising the personal allowance as a way to deliver a meaningful financial boost to millions and advocated funding the move by restructuring taxation to be more equitable, starting with capital gains and bank-related interest payments. Trade unions have echoed calls within Labour for increasing the personal allowance, and some of Burnham’s allies favour treating capital gains tax more like a wealth tax.

However, the proposal has faced criticism from Conservative Party chairman Kevin Hollinrake, who dismissed it as "utterly stupid sixth-form economics." He argued that increasing the capital gains tax rate could reduce overall tax receipts since investors might be discouraged from selling assets if their gains were taxed more heavily. Hollinrake warned that taxing capital gains as if there were no risk involved would deter investment, potentially harming job creation and economic growth.

As the government considers these options ahead of the next budget, the debate highlights the balancing act between addressing income inequality and maintaining incentives for investment. Both supporters and opponents emphasize different economic priorities, with the government weighing how best to manage fiscal policy amid ongoing inflationary pressures.