In his first major speech from No 10’s Rose Garden, Prime Minister Keir Starmer revealed that public finances are “worse than we ever imagined”, foreshadowing a “short-term pain for long-term good” fiscal statement in late October.

Mr Starmer emphasised the necessity of burden-sharing, stating, “Those with the broadest shoulders should bear the heavier burden… things will get worse before they get better”.

Financial experts have caution that raising taxes on wealth or capital gains could deter entrepreneurs and hinder wealth creation, which Mr Starmer has identified as his government’s top priority.

The Institute for Fiscal Studies (IFS) estimates that aligning capital gains tax (CGT) with the 45% additional income tax rate could generate £16.7 billion for the Treasury. However, HMRC warns that such a move might reduce receipts as people delay selling assets.

Laura Suter, director of personal finance at AJ Bell, said: “While the speech’s key points largely mirror those made by chancellor Rachel Reeves in July, Starmer still struck an ominous tone.

“Growth remains the priority for the government though it is anything but a rosy economic picture, with the £22bn ‘black hole’ supposedly identified when Labour came into power almost two months ago.

“In perhaps the most compelling indication yet of which taxes could be on the table in the October Budget, Starmer said that those with the ‘widest shoulders should bear the heaviest burden’, adding fuel to rumours around increases to capital gains tax and inheritance tax, while also doubling down on Labour’s manifesto commitment not to tinker with income tax, National Insurance or VAT.”

“His comments will also reignite the rumours of a specific ‘wealth tax’ to be paid by the wealthiest in the UK. This could just take the form of increasing existing taxes for investors and the top earners, or it could be a new, standalone tax on those with the biggest pockets.”

Where might the UK government turn for tax rises?

Looking at income tax, Ms Suter discussed a continuation of freeze on the thresholds: “While the chancellor pledged in the election campaign not to raise the rate of income tax, that doesn’t preclude extending the current freeze on thresholds, which is tantamount to raising tax by the back door.

“It was a tactic used by the Conservatives to raise taxes on working households, with rising wages at a time of high inflation providing a super-charged stealth tax on earnings. The effect is muted somewhat when wage rises are lower, which is to be expected as inflation comes down, but it’s still an easy way to boost tax revenues.”

Pointing out capital gains tax (CGT) as an “obvious” target for increasing revenue, Ms suter explained the government could consider aligning CGT rates with income tax, significantly raising taxes for investors. The Office for Tax Simplification previously noted that the disparity between CGT and income tax rates distorts decision-making.

While reducing the CGT exemption or increasing rates might seem straightforward, it could backfire, potentially reducing revenue by £2.05bn by 2027/28 due to changes in investor behaviour. Scrapping CGT tax breaks for businesses or removing CGT on death could generate revenue but would be contentious and might require inflation adjustments to avoid unfair penalties on long-held investments.

In regards to dividend tax, Dan Coatsworth, investment analyst at AJ Bell, said: “The previous government has already cut dividend tax allowance to the bone, going from £5,000 to the current £500. The big question is whether Labour is prepared to go any deeper.”

“HMRC is expected to collect almost £18bn from dividend tax in the current tax year so it is already a meaningful source of revenue. While slashing the allowance, perhaps to £250, cannot be ruled out, the new government would be incredibly unpopular with investors if it reduced the dividend allowance any further.

“Another option would be to raise the rate of dividend taxation, although there’s only so much room for manoeuvre with tax rates on dividends already very close to matching income tax rates for higher and additional rate taxpayers.

“The government will likely tread carefully here. Labour wants to encourage investment into the UK stock market and create a more vibrant place for British businesses to access growth capital. Therefore, taking even more of investors’ returns as tax would mean shooting itself in the foot.”

Inheritance tax (IHT), though despised, is another area of interest for hikes as it impacts only a small percentage of the population. 

“At 40% it’s already one of the highest tax rates, so it’s unlikely we’d see a headline rate increase,” Ms Suter added. “What’s more likely if Ms Reeves did want to change this tax is cutting allowances or whittling away certain reliefs to increase the amount some estates pay.

“A couple leaving their main residence to their children could potentially shelter a £1 million estate from inheritance tax, thanks to both the nil-rate band and the residence-nil-rate band – but either of these could be cut. Another option is taking a red pen to the reliefs given to businesses or to gifting rules – although these aren’t overly generous anyway.”

Tom Selby, director of public policy at AJ Bell, said pensions are another area of potential reform. The treatment of pensions upon death could be reviewed, potentially bringing them into the inheritance tax net. However, any such changes would need to protect those who have made decisions based on the current rules to avoid perceptions of unfairness.