What tax options does Britain’s new PM Burnham have

New British Prime Minister Andy Burnham has signaled he may ask the public to pay a little more in tax as the country confronts mounting spending pressures tied to an aging population, the need to rebuild its armed forces and broader investment ambitions.

Tax as a share of British economic output is already projected to rise to 37 percent this year, its highest level since 1948 and higher than in the United States or Japan, though still below several major European countries that offer more generous state pensions.

Burnham has said he intends to keep the fiscal rules set by finance minister Rachel Reeves, which require balancing day to day spending with tax revenue within three years. He has also backed Labour’s 2024 pre election manifesto, which ruled out many forms of tax increases. Last week, the International Monetary Fund said the government should reprioritize existing spending before turning to further tax rises. The following outlines some of the paths Burnham could pursue if he does decide to raise taxes.

Income tax, national insurance and VAT

Labour’s 2024 manifesto excluded increases to the rates of income tax, national insurance or value added tax, which together generate nearly two thirds of total tax revenue. Reeves nonetheless raised the employer portion of national insurance contributions by 26 billion pounds a year in her first budget, arguing the move fell outside the party’s pledge not to raise taxes on working people.

Labour, following the pattern of previous governments, has also frozen the income thresholds at which the 20, 40 and 45 percent tax rates apply, meaning average tax burdens climb as wages rise over time. Those thresholds remain frozen until 2031 and cannot generate immediate new revenue, though extending the freeze beyond that point would raise 5 billion pounds a year. The OECD said last week that Britain should reconsider VAT exemptions, which currently cover most food items and ebooks among other categories. Pensions minister Torsten Bell said such a change would conflict with the government’s cost of living goals, a priority Burnham also emphasizes. Burnham has previously voiced support for a reduced 10 percent VAT rate for hospitality businesses, and in a Monday interview with the Times, he acknowledged public frustration that the starting threshold for income tax has remained frozen at 12,570 pounds.

Corporation tax and business rates

Corporation tax on company profits accounts for 9 percent of total tax revenue, while business rates, a levy on occupiers of commercial property, contribute another 3 percent. Labour has pledged not to raise the corporation tax rate, though tax authorities estimate that 21 billion pounds goes underpaid each year, primarily by small and medium sized businesses. Burnham has said he wants to shift more of the business rates burden toward out of town warehouses and large superstores and away from shops and pubs situated in expensive town center locations.

Capital gains tax

Burnham told Labour Party members last year that Britain has overtaxed labor while undertaxing wealth, positioning capital gains tax as a likely target for additional revenue. Capital taxes currently make up 5 percent of government revenue, compared with 30 percent from income tax, and capital gains are taxed at lower rates than earned income. Former health minister Wes Streeting, once viewed as a potential rival to Burnham, proposed aligning the capital gains tax rate with income tax while only applying it to gains that exceed inflation. The IMF said such an approach could work but cautioned that capital taxes remain more susceptible to avoidance than other tax types, since some gains can be recorded outside British jurisdiction.

Council tax and stamp duty

Council tax serves as Britain’s primary tax on residential property and generates 5 percent of total revenue. It is calculated using estimated property values from 1991, a system Burnham has described as highly regressive. The campaign group Fairer Share lists Burnham among supporters of a proposal to replace both council tax and stamp duty land tax on property purchases with an annual levy of 0.48 percent based on current property values. Such a change would raise tax bills for residents in London and other high cost housing markets while lowering them in cheaper regions, and it would likely produce windfall gains and losses in property values for landlords and homeowners in the areas most affected.

Fuel and alcohol duty

Duties on fuel and alcohol each contribute about 2 percent of total revenue. Fuel duty is fixed in cash terms, and although budget projections assume annual increases in line with inflation, no government has actually raised it since 2011 out of concern over angering drivers.

Other taxes

Rather than raising broad based taxes, successive British governments have introduced numerous smaller levies, 14 since 2020 alone, bringing the total number of taxes on the statute book to its highest level in 200 years, according to research from former tax lawyer Dan Neidle. The Institute for Fiscal Studies has warned, however, that generating significant revenue from taxes applied only in narrow circumstances raises the risk of distorting economic behavior.