Could raising capital gains tax ease the cost-of-living squeeze?

Reports suggest that higher rates may be considered before the Autumn Budget. Would the change make a meaningful difference for people on the lowest incomes?

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The government is reportedly considering higher capital gains tax (CGT) rates to support people with the lowest incomes.

The prime minister, Andy Burnham, and chancellor John Healey are reportedly considering raising capital gains tax to as much as 45% to fund a possible 3,000 increase in the tax-free personal allowance, from 12,570 to 15,570.

The Telegraph reports that Labour donor and green-energy entrepreneur Dale Vince put forward the proposal in a Budget submission.

The Treasury would face a 20 billion cost. Vince said it could be paid for by raising CGT rates and ending interest payments on Bank of England reserves; cutting income tax for lower earners could then give the economy a lift.

Treasury officials and No. 10 are reportedly weighing the proposals before next month's Autumn Budget.

A Treasury spokesperson said the chancellor would announce tax decisions at fiscal events, as usual, rather than respond routinely to rumours, speculation or proposals.

What are the current rates of capital gains tax?

Basic rate taxpayers currently pay 18% capital gains tax. The rate is 24% for higher and additional rate taxpayers.

You can make 3,000 in capital gains each year before tax applies. Only gains above that allowance are taxed.

Both the previous Conservative government and the current Labour government have targeted capital gains tax (CGT) in recent years.

In the 2024 Autumn Budget, the lower and higher CGT rates rose immediately. The tax-free allowance had already fallen from 12,300 to 6,000 in 2023, then was cut in half again to 3,000 in 2024.

Is there support for raising capital gains tax?

Several people close to Burnham want the CGT rules changed so the Treasury can raise more money.

In May, Louise Haigh, now first secretary of state, argued that CGT rates should move closer to income tax rates.

"It would move the tax burden away from work and onto the accumulation of unproductive capital, which does little to expand the everyday economy," she wrote in an essay published in the Renewal journal.

That month, Defence Secretary Wes Streeting also urged the government to align CGT rates with income tax bands.

Dan Neidle, the tax lawyer who founded the Tax Policy Associates think tank, called Streeting's proposal "good." He suggested using the additional revenue from a higher CGT rate to reduce basic-rate income tax.

"Labour politicians would need some courage to do that, but I believe it is the right move now. The rest could go towards defence, for example," Neidle said.

The Centre for Policy Studies (CPS), however, warned that a substantial increase in CGT rates might reduce Treasury receipts because people would change their behaviour.

Daniel Herring, who leads economic and fiscal policy at the CPS, said the measure would penalize the productive investment Britain needs for growth. Those most able to pay, he warned, could simply leave the country.