Healey's First Budget: Five Tax Battlegrounds Explained

Inheritance tax raised a record £8.5bn in 2025-26, and the Office for Budget Responsibility expects that to climb to £14.5bn by 2030-31 — the backdrop to John Healey's first budget as chancellor next week. Labour's manifesto ruled out raising the "big three" — income tax, national insurance and VAT — so speculation has shifted to almost everything else. Here are the five levies most likely to move markets and households.

Is inheritance tax really a levy on middle-class families?

Conservative leader Kemi Badenoch has pledged to "abolish inheritance tax [IHT] as soon as we can afford it", arguing it was "supposed to be a tax on the super-wealthy" but has become a "tax on ordinary middle-class families in every corner of our country".

The receipts are indeed at record levels: £8.5bn in 2025-26, up from £8.2bn the year before. The OBR forecasts £9.5bn this year. Yet only about 5% of estates — roughly 30,000 a year — pay it. The headline rate is 40% above the £325,000 tax-free allowance, but reliefs matter more. A £175,000 residence allowance lifts the threshold to £500,000 for those leaving a main home to a direct descendant, on estates worth less than £2m. Spouses inherit everything tax-free, including unused allowances, so a couple can pass on up to £1m.

The effective rate tells the real story. Across all estates paying IHT in 2023-24, the average effective rate was 13%. On estates worth £1m to £1.5m, the average bill was £151,000 — 12% of total value.

One change will bite from April 2027. A rule introduced by former chancellor Rachel Reeves brings unspent defined contribution pensions into the IHT calculation for the first time. The government estimates that of about 213,000 estates with inheritable pension wealth in 2027-28, 10,500 will pay IHT where previously they would not. Another 38,500 will face bigger bills — an average increase of about £34,000.

Will capital gains tax bills rise further?

CGT receipts surged nearly 80% in a year, hitting £24.3bn in 2025-26, up from £13.7bn. Two cuts to the annual tax-free allowance by former chancellor Jeremy Hunt — from £12,300 to £6,000, then to £3,000 — drove much of that. The number of CGT payers jumped 45% in 2024-25 to an all-time high of 584,000.

HMRC says nearly half the tax raised in 2024-25 came from those making gains of £5m or more — under 1% of CGT taxpayers. Those aged 55-64 are most likely to pay it; that group and 45- to 54-year-olds accounted for 44% of payers and 56% of tax paid.

Reeves raised rates in her autumn 2024 budget to 18% for basic-rate taxpayers and 24% for higher and additional rate payers. Senior Labour figures have lobbied Healey to align CGT with income tax rates of 20%, 40% and 45%, arguing earned income shouldn't be taxed more heavily than asset gains. Denmark charges up to 42% on investment gains. But this week, reports suggested Healey has rejected calls to raise CGT — though nothing is certain until the budget lands.

Who pays the mansion tax?

From April 2028, owners of English properties valued at £2m or more will pay a high-value council tax surcharge on top of existing council tax. Four bands run from £2,500 a year for homes worth £2m to £2.5m, up to £7,500 for those worth £5m and above.

The government says fewer than 1% of English residential properties are affected, and the OBR estimates the surcharge will raise £400m a year. Estate agent Hamptons counts just over 138,000 English homes worth more than £2m, mostly in London and the south-east.

The consultation proposed deferral for asset-rich, income-poor owners — households with income of £35,000 or less and savings of £16,000 or less. Badenoch has pledged to scrap the tax. Healey reportedly considered, then rejected, extending it to £1.5m homes, which would have doubled its scope.

Is council tax about to become fairer?

Hundreds of thousands of Londoners face steep bill increases. Hammersmith and Fulham has warned bills could rise 150% — taking a band D bill from £1,009 to £2,522.50. Wandsworth and Westminster are considering near-doubling bills.

Six English councils can raise bills without limit over two years: five in London, plus Windsor and Maidenhead. They've been hit by reduced central government funding under the Fair Funding formula.

Stuart Hoddinott, associate director at the Institute for Government, says these councils received higher grant funding relative to need for years and used it to subsidise low rates. "From an individual perspective, these bills will be a shock," he says — but "bills in Westminster and Wandsworth are about 43% of the average rate in the country, which means that even if they double, they would still be in the bottom half of councils for council tax. They're exceptionally low."

This year a band D bill in Wandsworth is £1,028, versus £2,047 in neighbouring Lambeth. Kensington and Chelsea charges £1,667; Blackpool charges £2,513.

Will pensioners pay tax on their state pension?

The personal allowance has been frozen at £12,570 for five years, pulling more pensioners into income tax: 7.1 million paid it in 2022-23; 9.6 million do this year.

A confirmed 3.9% triple-lock rise next April takes the full new state pension to £13,036 — above the allowance. Pensions minister Torsten Bell has said those who only just exceed the allowance won't need to pay tax, promising the chancellor will spell out the mechanics in the budget. Of the 13.3 million state pension claimants, those whose only income is the state pension typically don't pay tax.

Steve Webb, former pensions minister and now a partner at LCP, expects the government to absorb the hit for those on the state pension alone. The 3.9% rise implies a £90 tax bill — and Webb suggests the government "might not issue demands for anything under £100". That threshold decision is one of several Healey must make public next week.