Four ways Labour could raise money in the Budget without hiking income tax

• Published

We're likely to hear a lot about the chancellor's "headroom" in this Budget.

That is the cash buffer the government has to help meet its own fiscal rules and reduce borrowing.

Economists think the buffer might have halved in the last six months from around £24bn to as low as £11bn, in part because of rising interest rates the government has been paying to borrow money from private investors.

The Chancellor, John Healey, might need to raise money to restore it, which would show the government's plan to reduce borrowing by the end of this Parliament is still on track.

At the same time, he is under pressure to find money to help people with the rising cost of living and to fund spending on defence. However, Labour's 2024 election manifesto pledged not to raise the rates of income tax, VAT or National Insurance.

Increasing taxes on capital gains or extending the mansion tax had been raised as possible options but have since been ruled out by government sources.

BBC Verify has looked at what other options could be on the table for the chancellor to raise some more money, external on Wednesday.

1. Increase taxes on banks

Banks in the UK have seen profits rise in recent years because they have been able to charge people higher interest rates when borrowing money.

And there is widespread belief among bank bosses that the chancellor is preparing to raise taxes on banks in this week's Budget.

Think tank Tax Policy Associates estimates, external that increasing the surcharge that banks pay on corporation tax from 3% to 5.5% could potentially raise an additional £1bn to £2bn a year for the Treasury.

A higher tax would initially reduce the profits that banks have to distribute to their shareholders.

Some shareholders will be wealthy investors. The banks have warned that additional taxes could deter them from investing in the UK, external, which could reduce jobs.

And ordinary savers could be indirectly affected too, if their pension investments include bank shares, external.

Banks could also pass some of the tax burden on to their customers by offering lower savings rates or higher borrowing costs, research suggests., external

2. Higher taxes on gambling machines

Former prime minister Gordon Brown has called on Healey to hike the tax on electronic gaming machines - such as those found in betting shops and adult gaming centres which can offer payouts of £500 per game - citing the social harm imposed by problem gambling.

The Social Market Foundation (SMF) think tank has estimated, external that doubling tax on these machines from 20% to 40% could raise could raise between £275m and £460m - depending on how gamblers reacted to it.

People who use gambling machines could also end up having the tax passed on to them through worse odds on games, though anti-gambling groups argue this could help discourage more people from using them.

Research from the SMF found that gambling machines are increasingly clustered on some of the UK's most deprived high streets, and that one in four people who play casino games on these machines gamble at risky or harmful levels.

The gambling industry has argued, external such a tax hike could cause betting shops, which own and operate the machines, to close down, by making them less profitable.

It has also argued that betting shop closures could reduce the money bookmakers contribute to horse racing, external, potentially putting jobs in that industry at risk too.

3. Get online marketplaces to collect VAT

Reports suggest the Chancellor is preparing to announce that big online marketplaces such as Amazon, Ebay and Temu will be made responsible for collecting tax owed by retailers selling on their platforms.

The Treasury estimates it is missing out on around £12bn a year, external in VAT revenues that should be paid by companies, which it calls the "VAT tax gap".

Tax experts say that part of the problem - although not accounting for the full £12bn of the VAT gap - is that some online sellers fail to comply with VAT rules, either by not charging VAT when they should or by failing to pass on VAT collected from customers to the government.

Enforcement can be difficult because some firms that use platforms like Amazon to sell their products are based overseas and falsely present themselves as UK-established businesses.

Others close down and reopen under different company names to escape their tax liabilities.

Reports suggest that this move to make big online marketplaces responsible for collecting the tax - rather than the individual retailers - would clamp down on this form of tax evasion and could raise around £1bn in extra VAT a year.

Amazon, which supports the move, has estimated it could raise £700m, external a year in VAT for the government.

Some sellers could respond by raising prices or leaving the platform, which could have an impact on some shoppers.

However, it would also level the playing field for online sellers, ensuring those businesses who charge VAT are not illegally undercut by those who break the rules and do not.

4. Cut welfare spending

The above three tax measures together would raise a maximum of only around £3.5bn a year.

That would be small relative to the sums of money the Chancellor might well need to restore his headroom and pay for any new spending.

Prime Minister Andy Burnham said in the summer he wanted a "fair and lasting" reduction to the UK's welfare bill, while the government is under pressure from opposition parties to find savings from working-age benefits.

The Conservatives claim they could make savings of £36bn a year by restricting people's access to welfare payments.

Reform say they would save £50bn a year in this way, although independent analysts say there are questions about how realistic it is to make such large savings.

Working health and sickness benefits have risen sharply since the Covid pandemic and the overall cost is projected by the Office for Budget Responsibility to increase from £68bn this year to £81bn in 2031.

Keir Starmer and Rachel Reeves attempted to reduce spending on these benefits , externalby £5bn a year by 2030, but were forced to reverse course after a revolt by backbench Labour MPs.

Independent welfare experts and economists say savings from the working age welfare budget are possible but would likely require upfront spending to help people into work, which could cancel out any near-term savings for the Treasury.

Cuts to health and disability welfare would reduce the incomes of people who currently receive those payments, external and/or those who would otherwise receive them in future - and campaigners warn of the risk of people being pushed into poverty.

However, if more welfare claimants were also supported into work, their overall incomes could be maintained or even rise.

Graphics by Callum Thomson and Lewis McBlane.