Labour is examining proposals to raise capital gains tax (CGT) to help finance a major increase in the income tax personal allowance, with the plan aimed at putting more money into the hands of lower earners.
The proposal would raise the tax-free income threshold from £12,570 to £15,570, creating a potential £20bn package designed to ease pressure on households. The idea comes as the government faces demands to respond to rising living costs and concerns about the impact of frozen tax thresholds.
Proposal Links Capital Gains Tax And Income Tax Changes
According to The Telegraph, the plan was submitted by Dale Vince, the founder of green energy company Ecotricity and a Labour donor. The proposal suggests that aligning capital gains tax rates more closely with income tax could raise around £14bn to support the allowance increase.
Mr Vince, who has donated £6m to Labour since 2013 via his business Ecotricity, said governments had “spent years squeezing people at the bottom, while handing billions to the banks and allowing wealth to be taxed more lightly than work”.
The submission argues that wealth currently receives more favourable tax treatment than earnings from employment. It proposes changes to CGT alongside ending interest payments on Bank of England reserves as ways to fund the increase in the personal allowance.
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Dale Vince Says Tax Changes Could Boost Household Spending
The green energy entrepreneur said: “If Labour wants to get the economy moving, it should put money into the pockets of people who will spend it.
“Raising the personal allowance to £15,570 would give millions of people a meaningful boost, with the biggest benefit going to those on the lowest incomes. We can pay for it by making the tax system fairer – starting with capital gains and the billions we currently hand to banks in interest.”
He added: “Give people money and they’ll spend it on our high streets. That means more demand, more economic activity and a stronger economy. It’s time to put working people first.”
Research commissioned by Mr Vince from the National Institute of Economic and Social Research (NIESR) estimated that a £3,000 rise in the personal allowance would leave the lowest fifth of earners around £600 better off each year while costing the Treasury approximately £20bn.
Government Reviews Options Ahead Of Budget
The proposals have been sent to the Treasury and No 10’s policy unit for consideration, though no final decisions have been made ahead of the October Budget.
Andy Burnham previously said the frozen personal allowance was one of the most common concerns he heard from voters while campaigning in his Makerfield constituency. He said he was examining ways to raise the threshold but warned that any move would have consequences for public finances.
The proposal has attracted debate over the possible impact on investment behaviour. Government figures suggest that increasing the higher CGT rate by 10 percentage points could reduce Treasury revenues by £3.5bn a year by 2028-29 because of changes in taxpayer behaviour.
The UK has already seen changes to CGT rules, with the main rate rising to 24pc from 20pc under former Chancellor Rachel Reeves. The annual CGT allowance was previously reduced from £12,300 to £3,000.
Capital Gains Tax Revenue Continues To Grow
Capital gains tax has become a larger source of revenue for the Treasury, raising more than £20bn annually compared with £13.1bn two years earlier. The Office for Budget Responsibility forecasts that CGT receipts could approach £35bn by 2030.
Mr Vince’s proposal suggests gradually introducing changes over several years to limit disruption for investors. It also draws on recommendations from think tank CenTax, including adjustments to CGT rates and changes to rules that currently remove CGT liabilities on assets transferred after death.
A Treasury spokesman said: “As has always been the case, decisions on tax are a matter for the Chancellor to set out at fiscal events, rather than routinely commenting on rumour, speculation or proposals.”
Treasury officials are continuing to examine options to reduce pressure on households, with discussions still at an early stage.
