Rachel Reeves seeks to reassure business ahead of Budget tax rises

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

UK chancellor Rachel Reeves will seek to reassure business that big tax rises planned for next week’s Budget will not set the pattern for the rest of the parliament, as allies insist the levies will be a “one and done” hit.

Government insiders confirm that an increase in national insurance paid by employers will play a major part in Reeves’ bid to fill what the government says is a £40bn gap in the public finances.

In an effort to provide “tax certainty” for the rest of the government’s term, Reeves will set out a “corporate tax road map” alongside Wednesday’s Budget.

Officials say this will include a cap on corporation tax at 25 per cent for the rest of the parliament — a Labour manifesto commitment — and a new system of “advance clearance” for investors on tax rules for big projects.

One official said the package of tax increases would be a “one and done” operation. An ally of Reeves said the chancellor wanted to “wipe the slate clean” and give business the clarity to plan for the future.

But a policy adviser at a large business lobby group said they had been given no assurance the government would not increase taxes in future Budgets: “They have not said anything about future fiscal events.” 

Reeves could raise about £17bn from a 2 percentage point rise in employer national insurance contributions, according to HM Revenue & Customs’ “ready reckoner”.

The possible alternative of imposing NICs on employers’ pension contributions at a flat 13.8 per cent rate would raise up to £18bn a year by the end of the decade, according to the Resolution Foundation.

But this route is less favoured by Reeves’ allies. Lord David Blunkett, a former Labour minister, warned on Friday that it could lead to employers cutting pension contributions.

Under either scenario Reeves would be expected to reimburse public sector employers.

Other tax increases are planned for private equity executives and the wealthy foreign residents who have benefited from the non-dom regime that spares them from UK tax on overseas income. Capital gains tax rates are expected to rise on share sales, and inheritance loopholes used by the rich will be closed.

Next week’s road map is not expected to contain any commitments on further changes to CGT or business rates, which will disappoint some business groups.

The Budget is also set to raise funds through freezing personal income tax thresholds for longer, even though Prime Minister Sir Keir Starmer has promised to spare “working people” from higher taxes.

The Labour government says it needs to increase taxes to right the public finances and step up investment in infrastructure and public services.

Government insiders added that Reeves’ road map would retain the “full expensing” capital allowance regime introduced by Rishi Sunak’s Conservative administration, which seeks to provide tax breaks for investments that improve productivity.

The current system of tax credits for research and development will be maintained.

Reeves will also announce plans for a new unit within HMRC to provide investors with “advance clearance” — or help in understanding how they would be taxed on future big projects. 

One government official said the unit would give “greater certainty over existing tax rules” but ruled out preferential tax treatment for large investors. 

A senior business lobbyist said the unit could help push some big investments over the line, since “the UK tax system is seen as increasingly complicated and difficult to navigate”.

While cautioning that the move was not a “game-changer”, the lobbyist said: “Adding certainty and clarity can only be a good thing.”

A tax partner at a Big Four accounting firm said the move would make the UK more attractive to investors, since HMRC had become “quite litigious” with big companies including in some cases where they had followed the tax authority’s guidance.  

While the UK gives multinationals advance clearance in limited areas such as transfer pricing, it gives less reassurance than countries such as Australia, the Netherlands and Luxembourg. 

Reeves is set to hold consultations on the design and scope of the new service early next year. 

David Gauke, a former Tory Treasury minister who oversaw business tax road maps in 2010 and 2016, said the exercise was particularly useful for large corporates making big long-term investment decisions.

“What’s really important is not what you promise to do, but what you promise not to do,” he said. “And of course it’s only worthwhile if you stick to your promises.”