Details of a secret memo sent by deputy prime minister Angela Rayner to chancellor Rachel Reeves calling for up to £4 billion of tax hikes have been called a “bitter blow for savers and investors” if the government decides to implement them in the future.
The memo was sent prior to this year’s Spring Statement, according to a report by The Telegraph. It proposed eight tax increases including reinstating the pensions lifetime allowance and changing dividend taxes.
Ultimately, Reeves did not adopt any of Rayner’s ideas and instead announced welfare cuts, expected to save £5 billion a year.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
However, experts fear that the tax hikes “could remain part of the debate” and that some ministers will push for them to be included in the Autumn Budget. Speculation about tax hikes come on top of concerns over cash ISA reforms, which would potentially have a massive impact on savers.
Latest Videos FromMoneyWeek
We take a look at what the memo contained, the likelihood of the proposals being introduced, and how they could affect savers and investors.
What was in Angela Rayner’s tax memo?
According to The Telegraph, Rayner’s memo pushed for a new tax raid on savers, investors and banks.
The two-and-a-half-page memo titled “Alternative proposals for raising revenue” was submitted by Rayner’s team to the Treasury in mid-March.
It proposed removing inheritance tax (IHT) relief for Aim shares, as well as introducing two measures to increase taxes on people who use companies to buy and sell housing, which can be used to avoid stamp duty.
Closing the commercial property stamp duty loophole and removing IHT relief on Aim shares would raise up to £2 billion each year, according to The Telegraph’s calculations.
Aim shares have already been targeted by Reeves. In last year’s Autumn Budget, the chancellor announced that Aim shares would no longer be exempt from IHT, and the tax relief would be reduced to 50%, effectively introducing an IHT rate of 20%. This will kick in from April 2026.
Rayner also called for the pensions lifetime allowance to be reinstated - which could raise up to £800 million in revenue each year - and to increase the rate of corporation tax on banks.
An extract of the memo read: “In March 2023, then Chancellor Jeremy Hunt announced the abolition of the pensions lifetime allowance. The lifetime allowance was a limit on the total value an individual’s private pensions could reach before high tax rates were applied. One option would simply be to reinstate the lifetime allowance at around its previous level of £1,073,100.”
Two further changes involved dividends. Rayner’s memo proposed scrapping the £500 tax-free allowance for dividends and increasing the tax rates paid on dividends by the wealthiest investors.
The eighth tax hike proposal was around freezing the threshold at which the additional rate of income tax kicks in. The 45% threshold is currently fixed at £125,140 until April 2028, but Rayner argues that extending the freeze “could raise revenue and would be consistent with the manifesto”.
How could these tax hikes affect savers and investors?
Experts say the dividend tax changes and a reintroduction of the pensions lifetime allowance, in particular, could hit investors and pension savers hard. Those investing in Aim would also see any IHT benefits completely wiped out.
Sarah Coles, head of personal finance at Hargreaves Lansdown, comments: “Investors have already seen horrible cuts in the dividend allowance from £2,000 in April 2023 to just £500 today. At the same time, frozen income tax thresholds have pushed more people into paying higher rates of this tax, plus those rates themselves were hiked back in April 2022.
“It means you don’t need an enormous portfolio outside of ISAs and pensions in order to start racking up a dividend tax bill.”
She adds that the cut to IHT relief on Aim investments, which will come into effect next April, means “plenty of people are already reassessing the role of these investments in their portfolio. Axing the relief entirely would exacerbate the situation.”
Jason Hollands, managing director of the wealth manager Evelyn Partners, tells MoneyWeek that “the bigger damage would be on entrepreneurial business founders themselves. The ability to get IHT relief on their business interests is a key reason why founders have chosen to list on Aim rather than on the main London Stock Exchange.
“If that relief were yanked away entirely in a tax grab, I would expect more business owners to exit the UK and relocate to more attractive tax jurisdictions.”
On the pensions lifetime allowance, Hollands warns: “Reinstating the lifetime allowance in its previous form would be a deeply regressive move, leading to a debilitating impact on public trust in the pensions system, which has been subject to relentless meddling.”
Could Rayner’s tax hikes become a reality?
While Reeves did not act on any of the memo proposals in her Spring Statement, there is concern that they could be discussed within government and potentially be introduced in the future.
Coles says the tax hikes “would be a bitter blow for savers and investors”.
She comments: “Westminster tussles are nothing new and we’re used to seeing private memos make their way into headlines. There’s no guarantee that any of this will ever see the light of day - however, there is a risk these issues could remain part of the debate.
“On the face of it, they may seem like suggestions that only affect the very wealthy, but the impact could be far more widespread. It’s vital the UK builds an investment culture, and has the right incentives in place to make this a reality. These changes would fly in the face of these aims, and some of them risk putting people off entirely before they get started.”
Hollands calls the memo “a tax-hiker’s wish list, that would have very negative consequences if adopted”.
He adds: “Angela Rayner’s leaked memo will no doubt fuel renewed speculation about where the government might come looking for further revenues if the economy doesn’t deliver and her narrow fiscal headroom disappears by the time of the Budget.”
Speaking to The Telegraph, Conservative shadow chancellor Mel Stride said: "At the very highest level, Labour ministers are debating which taxes to increase next.
"The chancellor has repeatedly refused to rule out another tax raid in the autumn, and now we know why - Labour's top brass, including the deputy prime minister, want to come back for more."
