The UK’s most expensive tax reliefs under the spotlight

14 January 2025

The rising rates in gilts could spell trouble for taxpayers. The Chancellor may soon find the Treasury’s cupboards are increasingly bare as bond markets push up the cost of the government’s borrowing. In response, it seems the focus is likely to be on Spring spending cuts, rather than additional tax rises, but once that lever has been pulled there may be few options remaining beyond further tax changes. 

The Chancellor will be reluctant to turn to taxpayers again so soon after the challenging reception to the Autumn Budget. In polling from More in Common soon after the Budget, only 13% of those polled considered the Budget would have a positive impact on them personally. Only last week, commitments were being made from Downing Street that the Chancellor “would not repeat the likes of (the) October Budget”. 

The challenge will be if economic growth slows, then so too could the expected tax receipts, leaving the Chancellor with a tax shaped hole to fill. Part of the answer may lie in raising tax revenues by stealth in cutting or curtailing the availability of tax reliefs. The latest statistics, published in December 2024, show that there are 107 ‘non-structural’ tax reliefs in the UK tax system, broadly tax reliefs designed to advance economic and social objectives. HMRC estimates that the cost of these reliefs for the 2023/24 tax year was £207bn. 

The vast majority of these tax reliefs do not cost very much in the context of the government’s finances. Indeed, half of the costed reliefs are estimated to cost less than £10m. There are however five tax reliefs which account for two thirds, a £124bn share, of the estimated annual cost, as summarised in the following table: 

Private residence relief Exemption from capital gains tax of gains on disposal of someone’s main home  £31bn 
Pension contributions Relief from income tax for pension contributions £28.5bn
VAT on food The zero rating of VAT on most food £25.1bn
Pension contributions Relief from National Insurance contributions for pension contributions £23.5bn
Construction and sale of new dwellings The zero rating of VAT on the sale of relevant residential properties and charitable buildings £16bn
Given the associated costs of these tax reliefs, could any of them be scrutinised by the Treasury to limit their future costs? As a starting point, it would be difficult for any changes to be made to the VAT reliefs on food and on the sale of residential properties. Surveys suggest that the cost of living is a concern for the majority of people in the UK and if reform is to be made to the taxation of food then any measures would need to be taken with care or they could hit the poorest in society hardest. Given the government’s challenging targets for house building, changes to the VAT rules on new homes would seem counterintuitive.

That leaves three of the more expensive tax reliefs to consider but all could attract significant criticism.

During the election campaign, the prime minister explicitly ruled out changes to the tax relief on the sale of someone’s main home, known as principal private residence relief. Whilst expensive, changes to this relief could have a major impact on the property market and limit supply further. Homeowners could be disincentivised to move as realising a CGT bill may result in them being unable to afford a comparable home.

If there were to be any changes to this relief, a possible route would be to limit tax relief to the extent that proceeds are reinvested into another property which is the approach taken in a small number of countries. Some might reasonably argue that there ought to be fewer barriers to encourage homeowners to downsize rather than erecting new ones.

The final option therefore lies with relief for pension contributions in respect of income tax and National Insurance contributions. The obvious criticism is that it will likely result in smaller pension pots and store up problems for future governments. Nevertheless, it has been rumoured that chancellors have flirted with the idea of curtailing these reliefs in the past and if there is to be a restriction to a major tax relief in 2025, this would appear to offer the path of least resistance.