Pensioners could be squeezed to help fund Labour’s defence spending increase, experts have warned.
It comes as European countries search for ways to increase defence spending and support Ukraine while battling sluggish growth and ballooning welfare state costs.
In Britain, Labour is scrambling to get the nation’s finances back on track after Chancellor Reeves’ budget raised taxes by £40billion and failed to spark growth.
Without growth, Prime Minister Starmer is in an increasingly difficult position with regards to Ukraine after Donald Trump slashed US support for the war-torn nation.
Military chiefs are preparing to meet in London to discuss peacekeeping plans for Ukraine amid ongoing Russian aggression
PAWithout the US’s economic might behind Zelensky, support for Ukraine is set to become significantly more expensive for Europe.
Starmer has already committed to spending 2.5 per cent of GDP on defence, a measure funded by slashing the foreign aid budget, but Army chiefs have warned this figure will need to be more like 3 or 4 per cent if Britain is to reverse years of military decline and police Ukraine’s border effectively.
Starmer, who yesterday said he is willing to deploy British troops in Ukraine for ‘as long as it takes’ to secure peace, has committed to 3 per cent by the end of the decade, but it is unclear how this will be achieved, prompting concerns raids on pensioners’ pockets or the wealthy could be in the offing.
Much of the concern centres on the fact European countries are pioneering ‘defence taxes’ to help boost their armed forces in the face of naked Russian aggression.
Sir Kier Starmer visiting troops in Estonia. The Baltic nation is pioneering a 'defence tax' to pay for massive defence spending increases
PAEstonia, for example, is pioneering Europe’s first ‘defence tax’ which will add an extra 2 per cent to VAT, income tax and corporation tax.
The Baltic state, which is firmly within Russia’ ‘sphere’, is introducing the tax to help hit its defence spending target of 5 per cent of its national income
Forecasts have shown as much as €800m (£673m) will be added to its military budget by 2028 after the taxes come into effect in July.
Pensioners who pay VAT and income tax are not exempt. In fact, pensioners are being asked to pay more than most as they will lose part of their tax-free allowance to the new levy.
Erle Kõomets, head of Estonia’s tax policy department, said: “The logic is that defence is a high priority for all of us. If things go wrong, they go wrong for all.
“Estonia’s pensioners were for the longest time rather financially insecure coming from the Soviet system. We are gradually moving out of that system and we definitely cannot paint it all with that board brush any more – that anyone who is a pensioner is poor.
“People are becoming more financially secure and nobody is excluded from taxation and pensioners also pay personal income tax.
“A tax hike is never popular. We haven’t had the easiest time, but I am convinced people do see the reason for it. We need to come up with the money [and] there is broad understanding.”
Such an increase on income tax in the UK could cost working Brits thousands. For example, if you were in the 40 per cent tax band earning £75,000 a year, a two per cent income tax rise would raise your tax bill from £17,486 to £18,786, a rise of £1,300.
What Estonia's two per cent income tax increase would cost working Britons
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Andrew Gosselin, personal finance expert and Senior Contributor at Coupon Mister, highlighted how unpopular this tax could be in the UK, however.
He said: "Raising taxes specifically for defence sounds straightforward on paper, but it’s never just about the math.
"Estonia has chosen a clear path: a small but broad levy across the board. It hits personal and corporate incomes, as well as consumption. Everyone chips in, including pensioners, and the government expects a significant boost to military spending.
"The logic is simple: if defence is a public good that benefits everyone equally, then everyone should contribute, no matter their situation.
"From a purely financial perspective, this approach raises predictable revenue and can be tracked closely against rising defence costs, which helps with planning.
"However, the conditions in Estonia are unique. The population is used to living next to Russia, and the sense of shared threat is immediate. That context helps secure some public backing for a measure that might be far less popular elsewhere."
Gosselin then outlined how Britain's situation is very different to Estonia's.
"If a British government tried something similar, there would be immediate debate about fairness, especially if it included pensioners and meant more tax for everyone, regardless of income level," he said.
"There’s also the reality that the UK already has one of the highest tax burdens since the end of the Second World War. Layering on an extra “defence tax” could be seen as a step too far, particularly when voters are telling pollsters they’re not keen on paying more to boost military spending.
"It’s not that it couldn’t work—financially, there’s nothing stopping a government from ring-fencing a portion of higher taxes for the armed forces.
"The challenge is purely political. A measure like this wouldn’t just raise funds; it would also highlight any dissatisfaction with high taxes and bigger government.
"Opponents would point out that the UK might afford a defence boost by cutting spending elsewhere, perhaps along the lines Grant Shapps once suggested with reductions in the civil service.
"Others would argue that the UK can’t or won’t embrace that level of belt-tightening, which leads to the same conclusion Estonia reached: either borrow more or tax more."
Keir Starmer has said Labour's commitment to the UK's Armed Forces remains steadfast
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Estonia is not alone in drawing up radical plans to fund defence spending uplifts.
In France, finance minister Eric Lombard has floated plans to introduce a new tax on his country's wealthiest to pay for France’s huge defence increase of £2.5billion every year until 2030.
The plans involve introducing a 2 per cent wealth tax on those with assets exceeding €100million (£84million).
Such a measure would perhaps be more politically viable for a Labour government and Chancellor Reeves has already proved her appetite for sweeping tax changes.
Arun Advani, associate professor at Warwick University, told The Telegraph: “It’s clear that there is going to be an increase to demand on defence relative to what we expected before the election.
“Either you have to be quite severe in cutting the state even further when public services are struggling or raise the money somehow, which means going for tax.
“Some other countries are looking particularly to taxes on wealth at a time when people have been squeezed for some time. The pain is relatively less at the top when you increase taxes but no one likes having their taxes increased.”
Analysis has revealed that if this were applied to someone with £126 million of assets in Britain, they would lose £840k to the Treasury.
This number rises to £6.72million for someone worth £420 million.
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However, Labour’s election campaign focused on the fact they would create wealth, so taxing it may go down very badly.
As Andrew Gosselin pointed out on Estonia's 'defence levy', it would be a huge political risk. He explained: "Estonia’s approach might inspire conversations here, but I doubt it will go much further unless the UK finds itself in a position where that sense of urgent threat is sharper.
"So yes, Labour could enact a similar measure in theory, but in practice, it would be a risk. The public mood isn’t there, spending cuts are already fiercely debated, and trust in politicians to ring-fence any new levy for defence is not guaranteed.
"If they decided to try, we might well see it proposed as a temporary measure, just like in Estonia, but that still wouldn’t guarantee a warm reception from voters who are already feeling squeezed.
"On a purely financial level, ring-fenced taxation can deliver predictable funds for a cause that’s deemed essential. Politically, though, it’s a leap many governments won’t want to take unless they have no other choice."
Nevertheless, Labour has proved it is happy to flagrantly break pre-election promises and blame it on the ‘£22billion Tory blackhole’, as the party did with farmers’ inheritance tax rules, WASPI compensation and not allowing energy bills to rise.
A government spokesman said: “The Government’s commitment to fiscal rules and sound public finances is non-negotiable.
“National security is a foundation of this Government’s Plan for Change, which is why we have increased defence spending by almost £3bn while delivering the highest pay rise for our armed forces in over 20 years.
“We will set out a path to 2.5pc once the Strategic Defence Review has concluded. We will not give a running commentary while the review is undertaken.”
