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Chancellor Rachel Reeves has “limited room for manoeuvre” in the October budget, with pensions taxation and capital gains tax (CGT) best suited to raise revenue, according to a think tank.

The Institute for Fiscal Studies (IFS) has said Labour's manifesto has created a significant constraint on the chancellor’s options.

Promises not to raise VAT, national insurance, or the main rates of income and corporation tax have left Reeves with a narrow path to raise the substantial revenues required to address the UK’s fiscal deficit. These taxes represent the bulk of government income, contributing around 75% of total tax receipts.

With the government’s hands tied on key revenue streams, Reeves will need to get creative, not just in finding ways to increase revenue but also in tackling some of the more glaring inefficiencies within the UK’s tax system.

Among the few viable candidates for revenue-raising are pensions taxation and capital gains tax. Both are areas that could generate significant sums for the Treasury, but each comes with risks.

Keir Starmer said last month that the new government would need to take “painful” decisions in the autumn budget after finding what Labour calls a “£22bn black hole” in the public finances.

Read more: Keir Starmer warns autumn budget will be ‘painful’

The chancellor announced in August she would scrap winter fuel payments for most pensioners, shelve plans for social care reform and axe road, rail and hospital investment as the first stage of a plan to reduce borrowing.

Pensions

According to the IFS, one of the most obvious choices would be to reduce the tax relief on pension contributions. Pension contributions benefit from income tax relief at an individual’s marginal tax rate. Restricting this relief to the basic rate of 20% — a move that has been suggested in various policy circles — could raise around £15bn annually. However, such a reform would add even more complexity to an already convoluted tax system.

Critics warn that it would create further economic distortions, particularly by discouraging higher earners from saving for retirement. This would be particularly problematic at a time when the UK is already grappling with an ageing population and rising pressures on public pension provision.

Capital gains tax

Capital gains tax is another area where reform could be on the table. At present, CGT is charged at rates lower than income tax, which has led to criticism that it disproportionately benefits the wealthy.

The IFS report said aligning CGT rates more closely with income tax could generate substantial revenue. But, as with pensions, such a move would need to be handled carefully. Increasing CGT without fully considering its design could discourage saving and investment, undermining the government’s long-term goal of fostering economic growth.

Income tax

One potential area for revenue is income tax, despite the manifesto's commitment not to raise the basic, higher, or additional rates, the think tank said. The chancellor could lower the income thresholds at which these rates apply, bringing in substantial sums. For instance, reducing the personal allowance or basic-rate limit by 10% could yield £10bn and £6bn per year, respectively.

Read more: 10 finance decisions you should avoid before the autumn budget

However, this would disproportionately affect “working people,” undermining Labour's pledge. The plan to freeze thresholds for four years, inherited from the previous government, is already expected to raise £8bn.

Inheritance and property taxes

Inheritance tax (IHT) reform is another option suggested by the IFS. Capping exemptions for pension wealth, business assets, and agricultural land could raise £2bn per year.

While IHT affects only about 4% of estates, the growing scale of inherited wealth means it is a ripe area for revenue increases in the coming years.

The IFS said council tax is widely regarded as in need of reform, particularly as it is based on outdated property values from 1991. Reforms in Scotland, which increased rates for higher-value properties, could be extended to England. Such a move could raise £1.5bn, or £3.5bn if applied more aggressively to the highest-value homes.

However, the think tank highlighted that additional council tax revenue would flow to local councils, not directly to the Treasury.

Other taxes

Fuel duties, which are expected to raise £25bn in 2024-25, could also be targeted. After years of freezing rates, fuel duties could be increased to align with inflation, yielding £6bn annually by 2029-30. Each additional 1% increase in the duty rate could raise £250m.

The chancellor might also explore the creation of new taxes or adjustments to smaller, lower-profile taxes. The reintroduction of the health and social care levy, scrapped by Liz Truss, could raise £15bn annually.

Read more: What we're expecting to see in the autumn budget

Meanwhile, smaller taxes, such as stamp duty land tax (SDLT) and insurance premium tax (IPT), could offer incremental revenue, but the think tank warned that increases to these taxes should be approached cautiously to avoid economic distortions.

Isaac Delestre, a research economist at the IFS, said Reeves faced a delicate balancing act in October. “With large swathes of the tax system seemingly off-limits due to Labour’s manifesto commitments, the chancellor is going into this year’s Budget with one hand tied behind her back,” he said.

“There will be a temptation to increase revenues in ways that would be economically damaging. Stamp duty deserves a special mention as a tax that should not be increased.

“But Rachel Reeves also has the power to fix some of the more glaring deficiencies of our tax system: taxes on pensions, capital gains, and inheritances are all crying out for reform.

“If she takes the opportunity to improve taxes, as well as increase them, she could be rewarded not only with more revenue but also with a tax system that is fairer and less of an impediment to growth.”

Reeves will deliver her autumn statement to parliament on 30 October.