Healey will not raise capital gains tax to income tax level, FT reports

Capital gains tax decision

The Financial Times reported on 13 October, citing four sources, that Finance Minister John Healey will not raise capital gains tax to the same level as income tax. The report followed speculation that a policy change could be announced at the government budget on 28 October, Healey's first. Capital gains tax is currently charged at 18% for basic-rate taxpayers and 24% for higher-rate taxpayers, compared with income tax rates of 20% and 40%. The FT said Healey could still opt for a smaller increase in capital gains tax. Healey is under pressure to raise billions of pounds to offset higher borrowing costs and fund Prime Minister Andy Burnham's plans for more defence spending and expanded social care.

Limited room under manifesto pledges

Healey has promised to stick to the Labour Party's 2024 manifesto commitments not to raise the rates of income tax, value-added tax, corporation tax or social security contributions. That leaves him with limited options. Capital gains tax sits outside those four pledges, so a smaller increase remains open. Capital gains tax raised £24 billion ($31.8 billion) in the 2025/26 tax year, which makes it a significant source of Treasury income.

IMF upgrade

The International Monetary Fund raised its UK growth forecast for this year to 1.3%, up 0.3 percentage points from its July update. It expects growth to edge down to 1.2% in 2027, from 1.3% previously, as higher energy prices and long-term interest rates weigh on consumption and investment. UK GDP grew 0.6% in the first quarter and 0.5% in the second quarter of 2026, stronger than expected. The Office for National Statistics has pointed to the strong expansion of AI-related businesses as one factor behind the upside surprise.

Healey responded to the forecast by pointing to the wider environment.

conflict in the Middle East and Europe is hitting people in the UK and around the world. But Britain's economy is showing strong international resilience in the face of these challenges.

Healey is under pressure to announce an energy support package before the sharp rise in energy bills expected in January, but the IMF advises against across-the-board subsidies. The Fund says any support should be temporary, targeted and non-distortionary.

Stay the course

Silvana Tenreyro, the IMF's economic counsellor and a former member of the Bank of England's monetary policy committee, spoke at the launch of the IMF's twice-yearly World Economic Outlook at the Fund's annual meetings in Bangkok. She said the UK stands out among G7 countries in having a plan to narrow its deficit. The launch came a little over two weeks before the 28 October budget, and her message to the government was direct.

The message for the UK is simply, stay the course.

Borrowing and debt

The IMF said the UK is doing better than all other large economies at tackling borrowing, and projects it will have the lowest annual borrowing of the G7 group by 2031. The G7 includes Canada, France, Germany, Italy, Japan and the United States. Sir Howard Davies, former deputy governor of the Bank of England, attributed this largely to the UK having a majority government committed to tackling the problem, through tax rises, cuts to public services, or a mix of both. He said the US has said little about reducing its deficit, while France and Germany lack majority governments. Davies put the UK position in these terms:

So, we [the UK] are not great students, but we look somewhat better than some of the others we are sharing the class with.

Davies cautioned that the economy is still growing slowly.

Rate expectations

The Bank of England's nine-member monetary policy committee is widely expected to raise the policy rate at its November meeting, echoing similar moves by the Federal Reserve. Markets have been revising up their expectations of future inflation and interest rates across big economies since the Middle East conflict re-escalated in the summer. The IMF warned that prolonged high oil prices and rising interest rates could weigh on growth. Energy prices therefore sit at the centre of the outlook for both the budget and the central bank.