The taxes that could rise to pay for Burnham’s cost-of-living boost

Andy Burnham is making a raft of announcements this week to help households with the cost of living – but senior economists have warned this will come with a hefty price tag. The new Prime Minister announced his first measure on Tuesday – cutting VAT on household electricity from 5 per cent to 0 per cent from 1 October. More is on the way, with Burnham already providing some clues about what cost of living support he is planning and where he may get the money from. But he is already facing speculation over whether he will hike some taxes in his first Budget after hinting he will be “asking for a little bit more” from some people. Helen Miller, director of the respected Institute for Fiscal Studies, told The i Paper that raising large sums by taxing wealth would require “serious reform of our current taxes”, while economist Paul Johnson, who used to lead the think-tank, warned: “We could be in for big tax hikes”. Here is how the cost of living package is shaping up, and how he might pay for it. VAT off electricity bills Cutting VAT on electricity bills is expected to take around £45 off the yearly Ofgem price cap in October. Suppliers will be expected to pass the VAT reduction on to all customers, as they did with the £150 taken off bills at the last Budget. The move is estimated to cost around £850m in 2026-27. The Government says the VAT cut will be paid for by scrapping Sir Keir Starmer’s Digital ID programme, which had been expected to cost £1.8bn over the next three years. However, Darren Jones, the former minister responsible for the scheme who Burnham sacked, said it was never fully funded and argued the Government would need to explain how it will pay for new policies at the Budget. Downing Street insists the policy is funded, saying money that would have been found elsewhere in departmental budgets for Digital ID will instead be used to fund the VAT cut. There has also been speculation that Burnham could go further in the future, removing the remaining levies from household electricity costs and shifting them into general taxation. The Resolution Foundation said this would cost £2.6bn. Raising the personal allowance Burnham has hinted that he wants to unfreeze the personal allowance, which has dragged more low-income workers into paying tax. He said the five-year freeze at £12,570 was “the thing I heard the most on the doorsteps” while campaigning in the Makerfield by-election. If Burnham wanted to unfreeze the threshold for a single year – in other words, to uprate it in line with inflation in April 2027 but then keep it frozen until April 2031 – the IFS calculates that it would cost just over £2bn a year in today’s terms. If he scrapped the freeze entirely – resuming uprating in April 2027 and then maintaining default uprating thereafter – it would end up costing £8.5bn to £9bn a year by the end of the forecast in today’s terms. £2 bus fare cap Inspired by his proudest achievement as Mayor of Greater Manchester, bringing the city’s buses under public control and cutting fares, Burnham is believed to want to lower the cap on bus journeys across the country back to £2. Former prime minister Sir Keir Starmer and former chancellor Rachel Reeves raised it to £3 in January 2025. The Resolution Foundation said reducing the cap in England to £2 would cost around £300m. So, those are the giveaways, but where could the rest of the money come from to pay for them? CGT reform? According to the Resolution Foundation, a significant amount of money could be raised by “closing death and exit loopholes in capital gains tax (CGT)”. Currently, if someone owns assets – such as shares, property, or a business – until they die, any increase in value over their lifetime is usually not taxed. Also, unlike many other countries, the UK generally does not charge tax on those gains when someone leaves the UK. The think-tank estimates that removing them could raise around £4bn in extra tax revenue. Miller told The i Paper that the pledge in Labour’s 2024 manifesto not to raise the three main taxes – income tax, national insurance and VAT – is a “serious constraint” which might also push new Chancellor John Healey and Burnham towards CGT changes. “Reeves has already tapped some of the other revenue-raising options,” she said. “Raising additional large sums by taxing wealth would require serious reform of our current taxes, including CGT.” A 50p top rate of income tax? While Burnham has previously said that he will stand by Labour’s manifesto, it is possible that he could try to do something at the edges. Speaking to journalists on Monday, Burnham declined to rule out raising the top rate of income tax to 50p. Currently, the additional rate is 45 per cent on earnings above £125,140. Such a move would be popular with Labour MPs and members, but would only raise a modest amount. Simon French, chief economist of Panmure Liberum, said it would bring in £730m. What else? Burnham could raise money in several other ways. Miller said: “There are many ways to either cut back government spending or increase taxes in order to fund new priorities, such as increasing the personal allowance. None of the options will be easy.” One option would be to reduce the tax relief people receive on pension contributions. Currently, higher-rate taxpayers get more generous tax relief than basic-rate taxpayers. Applying the basic rate across the board would raise as much as £15bn, according to the IFS. Burnham is also likely to return to welfare reforms under reappointed Work and Pensions Secretary Pat McFadden in a bid to bear down on benefit spending. Even then, some economists think that Burnham’s spending pledges are outpacing his ability to deliver them. Rob Wood, chief UK economist at Pantheon Macroeconomics, told The i Paper: “Covering his full list of ideas, including higher defence spending, means either higher taxes or failing to follow through with the policies.” French posted on X that the cost of taking defence spending to 3.5 per cent of GDP – something which Healey is committed to and which would cost £24bn a year – along with raising the personal allowance would require “Osborne-era welfare reforms”, flat rate pension tax relief and reforms to the state pension triple lock in order to retain the Government’s existing fiscal buffers. “This is why most investors are assuming these changes won’t happen,” he added. Johnson, who is now provost of Oxford University’s Queen’s College, also voiced scepticism. Posting on X, he said Burnham had already promised to raise the personal allowance, spend more on social care and defence, keep the triple lock and stick to the fiscal rules. “Either he can’t deliver this or we’re in for big tax hikes,” he said. The Prime Minister’s spokesman said “funding for longer-term measures, will be taken at the Budget”. “All decisions at that point will be funded and also consistent with the Government’s fiscal rules,” they said.