It’s possible to overanalyse specific responses in interviews, and we are already seeing renewed focus on the language used by parliamentarians in defining where the line is drawn on the government’s commitments on tax.

Labour’s 2024 manifesto commitment outlines that the government “will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of income tax, or VAT.” That has inevitably led to questions on what is meant by “working people” and where the line is drawn. Darren Jones, Chief Secretary to the Treasury, has recently outlined that it broadly means “anyone that gets a payslip”.

That broad definition may be an overgeneralisation, and too much could be read into it. For example, it would appear to exclude the self-employed, who would probably feature in most people’s definition of a working person, and most likely the Treasury’s definition as well.

What it arguably suggests, however, is that passive income sits outside the manifesto commitment. With pressure mounting on the Chancellor to introduce a wealth tax, an alternative route that may be considered is to increase the rate of tax on the income generated by holding assets.

It has already been reported that the government is considering an increase to the rates of income tax applicable to dividend income, as we have previously highlighted, but could this go further? Passive income for this purpose might potentially include dividend income, interest and other savings income, miscellaneous income and rental income (although, there will be some professional landlords who would contend they are working). As it stands, other than dividend income, all such income is typically subject to the same rates of income tax as earnings, but without any liability to National Insurance contributions (NICs).

The latest HMRC data from 2022-23 shows that taxpayers received a total of £107bn from property, savings, dividends and other income. That is a substantial amount and a tax rise of 2% across these types of income could potentially generate over £2bn of additional tax receipts for the Exchequer.

There are of course variables which could impact on the tax take, and it would require more precise modelling, as business owners may opt not to pay dividends in response to a tax rate rise, and interest rates on savings can move, in line with the Bank of England’s base rate. Similarly, a tax rise on investment income could result in more people maximising individual savings account (ISA) allowances, and exploring other routes to reduce their income, subject to higher tax rates.

Any such move is unlikely to be popular with investors, and could add further complexity to an already swollen tax system. In the longer-term, it might be possible to argue it makes the path easier to ultimately abolish NICs altogether if income tax was already higher for some sources. However, the prospect of sufficient fiscal headroom to fund tax cuts looks some way off, with seemingly ever-increasing demands being made to increase government spending. Any such justification is likely to be lost on the majority of people as a result.

If the government were to pursue this, it would arguably represent a wealth tax in all but name, although the burden would be felt much more widely. It may well fall heaviest on those who rely on investment income to support their living costs, while others in turn respond by seeking to defer an income tax liability for as long as possible.

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