Rachel Reeves admitted on Friday that some working people will face tax rises in her Budget next week.
The Chancellor said she could only commit to not raising “key” taxes on workers on Wednesday, despite a Labour manifesto pledge that working people would not face increases.
Her comments came after Sir Keir Starmer indicated that landlords and shareholders were not covered by the manifesto pledge because they were not “working people”.
The Prime Minister said people who earn extra income from property and investments are not covered by Labour’s pledge to protect workers from paying more income tax, National Insurance or VAT.
He was accused of engaging in a “class war” by Lord Lamont, the former Conservative chancellor, who said the term “working people” was designed to imply “working class”.
Ms Reeves is seeking to use her Budget to claw back £40 billion for public spending, most of which is expected to come from tax rises rather than spending cuts.
Asked on Friday night whether some working people faced tax rises, the Chancellor told LBC: “It’s not possible to close the gap in our public finances without having to make difficult decisions. I’m making the choice to not increase the key taxes that working people pay.”
Ms Reeves denied this would be in breach of Labour’s manifesto, saying: “We made a clear commitment in our manifesto not to increase the key taxes that working people pay, National Insurance, income tax and VAT.”
Her remarks came during a growing backlash against Sir Keir’s comments, which were made in Samoa on Thursday night.
Asked on Sky News whether “someone who works but gets their income from assets as well, such as shares and property” was a working person, he said: “Well, they wouldn’t come within my definition. I think people watching this will know whether they’re in that group or not.”
Sir Keir said his definition covered “those people who work hard and are anxious about whether they can make ends meet, and know that should something happen to them and their family they can’t write a cheque to get out of the problem”.
On Friday, No 10 attempted to clarify that he had only been talking about people who “primarily get their income from assets”.
The Prime Minister’s spokesman said: “He’s accepting that people have some savings. Those might be cash savings, or stocks and shares ISA savings or whatever. So it’s not precluding people that have a small amount of savings. Those individuals clearly are working people.”
He would not say what level of savings Sir Keir considered to be small, only that it was more than would be required by families to get out of “difficulty”.
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However, Lord Lamont, who was chancellor under Sir John Major, accused Sir Keir of stoking a “class war”.
“I must say I dislike this phrase ‘working people’, not just because of its ambiguity, but I think it is deliberately designed to imply working class, which I think is an out of date idea and it is appealing to old-fashioned Labour mythology,” he said.
“I think it is a very unpleasant term to talk about ‘working people’. Why is a pensioner not a working person? They have worked all of their life. It is ridiculous.”
Asked whether he believed Labour was seeking to wage a “class war”, the Tory peer said: “I think it is a bit of a class war thing, although I have noticed it is also a term that has been used by the Democrats in America.”
Lord Clarke, another former Tory chancellor, said Labour had been irresponsible to rule out rises in taxes on income or VAT that could be levied “fairly” across the maximum number of people.
“Whatever happens, they are not going to raise taxes that are the fairest to share the burden and normally raise 70 per cent of the revenue,” he added. “They are now going into all these other things and allowing silly debate about whether they are called workers or not.”
Sir Keir has previously said taxing assets such as property, dividends, stocks and shares was a “broader, fairer way of raising taxes”.
In a Sky interview discussing ways to fund social care three years ago, he said: “We should not say that the whole weight has to fall on working people, the people who earn their living from a wage.
“Why shouldn’t those who get their money from other means, whether it is dividends, stocks, shares, property, pay their fair share… Why should a landlord not pay a penny but the working tenant does because they earn a wage rather than rent?”
One option identified by financial experts to target shareholders would be to raise the rates of dividends tax or cut the tax-free amount investors can earn from dividends further.
The allowance was halved in April, from £1,000 to £500, by Jeremy Hunt, the former chancellor, who had already cut it from £2,000 last year.
Another option could be reducing the amount savers can pay into tax-free stocks and shares Isa accounts – which currently stands at £20,000 a year before they need to pay dividends taxes – or introducing a lifetime cap.
For landlords, experts suggested that they could be forced to pay National Insurance on their rental income. It has also been suggested they may be charged an additional rate of council tax, which tenants currently pay, on their rental homes.
Tim Stovold, of Moore Kingston Smith, an accountancy firm, told The Telegraph: “Labour could introduce a landlords’ council tax – so if you’re renting out a property you also pay.”
On Friday, landlords criticised Sir Keir, saying that more than two thirds of buy-to-let investors were working to make ends meet.
Ben Beadle, the chief executive of the National Residential Landlords Association, said: “It is simply not true that landlords are not working people.”
He pointed to official data from the government’s private landlords survey in 2021 showing that 30 per cent of property investors were employed full-time and a further 10 per cent were working part-time.
That was alongside an additional 28 per cent registered as self-employed, while 13 per cent were self-employed as a landlord. Thirty-five per cent were retired.
Mr Beadle said: “Rather than stoking misconceptions, the Government needs to focus instead on the key challenge in the rental market, namely a lack of homes to rent to meet ever-growing demand.”
Ms Reeves is poised to announce sweeping tax measures next Wednesday to cover areas including workers’ pay rises, costs in the asylum system and extra funds for the NHS. Potential measures thought to be under consideration include rises in fuel duty, capital gains tax and employers’ National Insurance contributions.
On Friday, Lord Blunkett, a former Labour Cabinet minister, warned Ms Reeves that imposing National Insurance on employers’ pension contributions risked eroding living standards.
The former work and pensions secretary said the move was “very worrying” because it could lead to employers reducing pension contributions, adding that he would “advise strongly against this”.
