Increasing tax on domestic flights could feature in Labour’s Budget plans

The Labour government is staring down the £22bn deficit and will no doubt have been looking at various solutions that could help raise funds to plug the hole in the finances. Despite best attempts to justify the ‘difficult decisions’ that lie ahead, the first major announcement of restricting recipients of the winter fuel payment, to save around £1.5bn per annum, has seemingly been met with what might be best described as muted approval. Polling undertaken by YouGov showed around 47% of those surveyed supported the measure of means-testing the winter fuel payment.  

The chancellor has a difficult challenge ahead of identifying further tax raising measures that won’t see her and the wider government’s popularity plunge as a result. There has been lots of speculation around eye-catching changes to pensions tax relief, capital gains tax and inheritance tax, but it seems likely that these may need to be supplemented with smaller tax raising measures. 

One of the more substantial tax levers that remains available to Rachel Reeves is Air Passenger Duty (APD). Perhaps unsurprisingly, APD receipts have rebounded strongly following the pandemic to record levels, generating revenues of over £3.8bn in the year to 31 March 2024. In the first quarter of the current financial year, APD has generated £1bn, the highest first quarter receipts on record. However, a key feature of Labour’s plans is to focus on net zero targets and to ‘decarbonise transport’. Increases in air travel could be seen as moving things in the wrong direction, so perhaps we could see Rachel Reeves look at increasing APD to disincentivise flying, encouraging other means of transport instead.

In particular, domestic flights within the UK could come under focus. The point is highlighted by HMRC’s annual report and accounts for the 2023/24 year, which shows 13,096 domestic flights and 2,512 international flights were taken by HMRC staff in the year. With around 65,000 HMRC staff, that equates to around 10% of staff taking one return domestic flight a year. Whilst flying is likely to be unavoidable in some cases, it may be that such flights have been taken on a cost and efficiency basis. It might be that this is due to the lack of reliable and cost-effective train travel options available, meaning flying is the next best option. 

If APD were to be increased, any additional funds might be earmarked to help encourage more environmentally friendly transport options, or to help prevent future strike action. There is clearly scope for improvement in the national rail system as, in Q4 of 2023/24, close to a third of all trains were delayed for a whopping total of 3.68m minutes, or, 7 years. That was an improvement from Q3, where national trains registered total delays of 4.86m minutes (or over 9 years’ worth of delays). It will be hoped of course that these figures will improve following the recent pay settlement agreement.

Raising APD would not be a new move by Labour, but an extension of the previous government’s policy. Back in January 2024, Labour took issue with Rishi Sunak’s plans to increase APD rates on all flights, except for private jets. APD rates have been increased since 1 April 2024, and as it stands, the lowest APD rate for domestic flights is £7 per flight. Illustrative figures suggest that if APD was increased by £1 for all passengers in economy class, it would raise an additional £130m in 2025/26. There may however be a reluctance to further increase the cost for families taking holidays overseas, and perhaps the easier political target would be to focus on domestic flights instead.

Whilst the potential additional tax revenues may be relatively trivial in the context of the Treasury’s overall tax receipts, it’s not uncommon for chancellors to have to identify a few hundred million here or there to ensure the books are balanced. An increase to APD rates may provide Rachel Reeves with some much-needed wriggle room to manoeuvre.