Income tax vs capital gains tax: UK Budget keeps the gap
Key takeaways
- The UK will not lift capital gains tax to income tax levels, Reuters reported, citing the Financial Times.
- The gap stays wide: capital gains tax runs at 18% or 24%, while income tax runs at 20% or 40%.
- The Budget lands on October 28, and a smaller rise or a change to death rules is still possible.
Income tax will stay higher than capital gains tax in the UK. That is the latest signal before the Autumn Budget. Reuters reported the news on October 13, citing the Financial Times.
What happened
Finance minister John Healey will not raise capital gains tax to income tax levels. The Financial Times reported this, citing four sources. Reuters shared the report on October 13. The news follows weeks of talk about a big tax change.
The Budget date is October 28. Healey faces pressure to raise billions in tax. Higher borrowing costs have shrunk his room to move. He must also fund plans for more defence spending.
He must also fund plans for wider social care. Prime Minister Andy Burnham backs those plans, Reuters reported. Healey could still pick a smaller rise in capital gains tax.
The Financial Times said that choice stays on the table. Nothing is final until Budget day.
What the two taxes mean
Income tax is the tax on pay. You earn wages, and the state takes a share. Capital gains tax is the tax on profit from a sale.
You sell an asset, and the state takes a share of the gain. An asset can be shares, a business, or a second home. The gain is the sale price minus the buy price.
You pay tax on the gain, not the full price. Here is a plain case. You buy shares for 10,000 pounds.
You sell them for 15,000 pounds. Your gain is 5,000 pounds. Capital gains tax applies to that 5,000 pounds.
The rates show the gap. Capital gains tax runs at 18% for basic-rate taxpayers. It runs at 24% for higher-rate taxpayers.
Income tax runs at 20% for basic-rate taxpayers. It runs at 40% for higher-rate taxpayers. Reuters gave those four rates.
So pay faces a higher rate than gains. The gap is two points at the basic rate. The gap is 16 points at the higher rate.
That gap is the heart of this story.
Healey has limited room to move. Labour made a clear promise in its 2024 manifesto. It promised not to raise income tax rates.
It promised not to raise value-added tax. It promised not to raise corporation tax. It promised not to raise social security contributions.
Reuters listed all four pledges. That leaves capital gains tax as one of few levers. But a big rise now looks off the table.
Why it matters
The gap shapes how people pay tax. Workers pay income tax on wages. Sellers pay capital gains tax on gains.
A seller can pay less tax than a worker on the same cash. Some people call that unfair. Others say a high gains tax stops sales.
Both sides watch the Budget with care.
The numbers are large. Capital gains tax raised 24 billion pounds in the 2025-26 tax year. Reuters gave that figure.
It came with a warning too. Economists warned that a rate rise could change behaviour. People may choose not to sell assets.
Some people may leave Britain. The Treasury could then take in less cash, not more.
The gap with dividends is wide too. Dividends are payouts from company profits. Tax Policy Associates put the top dividend rate at up to 39.35%.
Capital gains tax tops out at 24%. That leaves a 15-point gap. The gap was 19 points before the October 2024 rise.
Owners can pick how to take cash from a firm. They can take dividends, or they can sell. The lower gains rate can push them toward a sale.
Tax Policy Associates said this choice is real. It cited tax records to back that claim.
Pay faces a still wider gap. Tax Policy Associates compared one pound of salary with one pound of gains. One pound of salary can face a 47% rate.
That rate adds income tax and national insurance. One pound of gains faces 24%. The gap is stark.
The site also gave some history. Nigel Lawson matched the rates in 1988. He said split rates warp choices and feed tax avoidance. The rates split apart again in later years.
If you pay tax through your job, learn how tax withholding works. It shows why your pay slip looks the way it does. Money that grows can also add up fast.
See how the rule of 72 works for a plain guide.
What happened last time
The last round of talk moved real money. Tax year 2024-25 saw record taxable gains of 127 billion pounds. Tax Policy Associates gave that figure.
It was 82% above the prior year. The rush came from Budget talk. People feared a rise in capital gains tax.
They sold early to beat it. The October 2024 Budget then raised rates by less than many feared. But the rush was far larger than the rise.
The result was a costly mix-up. The Office for Budget Responsibility had expected a 2 billion pound rise in receipts. The actual rise was much higher, perhaps 6 billion pounds.
Tax Policy Associates gave both figures. About 45 billion pounds of gains were brought forward. Those gains were taxed at 20%, not 24%.
The site put the cost at 1.4 to 2.4 billion pounds. Talk alone had moved the cash. The same rush may have struck again before later Budgets.
The site said hard proof will take time. Tax on 2025-26 share sales is due in January 2027. Full HMRC figures will land in August 2027.
What happens next
The Budget lands on October 28. A smaller rise in capital gains tax is still possible. The Financial Times left that door open. RSM UK urged care with a simple rate rise.
A rushed rise could backfire and cut revenue. The firm said the Chancellor has had limited time in office. It said he should take time past the Budget to weigh his options.
One other change may prove more likely. It concerns gains on inherited assets. Right now, capital gains tax is wiped out on death.
RSM UK called this forgiveness. The rule can shape choices in odd ways. A gift made in life can face two taxes.
A gift passed on at death can face none. That gap can push people to hold assets.
The change would work in a simple way. An heir would inherit the gain, not just the asset. No tax would fall due on death itself.
Tax would fall due only on a later sale. RSM UK said this route could raise over 2 billion pounds a year. The Office of Tax Simplification gave an older estimate in 2020. It put the gain at up to 900 million pounds a year over five years.
That used the old 20% main rate. RSM UK said the short-term gain is now at least 1 billion pounds. The rate has since risen to 24%.
Asset values have also risen. The firm said receipts could pass 2 billion pounds a year over 20 years.
Tax Policy Associates took a bolder view. It said full reform is dead. It said the rush to sell has already used up the gains.
A higher rate would now raise little in its early years. It could even cost cash at first. The site said the best move is a clear pledge.
It urged no capital gains tax changes for the rest of this Parliament. That is a view, not a fact. The Budget will show what Healey picks.
No rule has changed yet. The current rates stay in force until the Budget says otherwise. Watch October 28 for the facts.
The gap between income tax and capital gains tax looks set to stay.
Money fears are not just a UK story. Australia faces a recession warning as house prices fall.
This article is for information only and is not medical/financial advice.
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