We have a Labour government for the first time in nearly 14 years!
Prime Minister Keir Starmer's party has swept to a landslide victory at the UK General Election on 4 July 2024. This mandate was achieved through a manifesto of policies, some of which include:
The state of the nation's public finances paints a sobering picture! For the 2023/24 tax year, UK government expenditure reached a staggering £1.2tn, equating to £17,000 per individual. In stark contrast, the government's total revenue for the same period fell just short of £1.1tn. This resulted in an annual budget shortfall of £121bn, highlighting how spending remains significantly higher than income.
There is therefore a considerable gap to be breached if the Labour party are to get the current budget into balance and achieve a position where the nation's debt is falling, as they have pledged to do. Spending is still set to increase, but economic growth has been anaemic for many years. The likelihood is additional tax revenue will need to be found to fund their commitments. That likely means higher taxes, leading to questions as to where the focus of tax rises will be?
In this blog post we explore the tax policies the new government have stated they will pursue, and we also speculate as to what other potential future tax rises could look like. Specifically this covers:
Keir Starmer and Chancellor, Rachel Reeves, stated in their campaign that the below areas would incur tax rises. Given how vast the UK tax system is, the Chancellor has a plethora of options to raise tax revenue but none of them appear particularly simple to implement.
Private schools face the removal of their VAT-free status on their school fees, and potentially closely associated costs. Reports in the Guardian suggest that some parents have been paying up to 7 years of fees in advance in an attempt to escape the additional VAT burden.
Tax specialists are said to be concerned that independent schools could then face VAT legal challenges from HM Revenue & Customs (HMRC), resulting in an eventual significant tax bill that the schools are then forced to pass on to parents.
The issue is that paying school fees in advance doesn't necessarily work in the manner of other advanced payments. It may not be akin to paying an agreed sum for a product, advanced fees may instead be treated as a deposit with a school that's then drawn down on so as to pay for each term's fees.
School fees like other products and services are likely increase over time. The impact of this is that where this does happen, a more significant amount of the deposit is used up than was expected. That then means that parents paying in advance would have to put up additional sums. The question then that schools and parents face, is the tax payable at the point of pre-payment or at the start of each term?
Even some independent schools are advising parents that making pre-payments now won't necessarily protect against a future VAT charge! Labour estimates the £1.5bn in additional tax revenue from this measure will fund 6,500 new state school teachers.
The drafting of the legislation relating to this change will be key, as the extent to which VAT will apply to closely associated supplies, such as catering and school trips for example, will need to be established and taken into account.
The taxation of wealth is a theme in the Labour manifesto to support a public spending programme. As part of this, the UK's Inheritance Tax (IHT) regime is set to be expanded to include foreign assets that are held in trusts that are designed to avoid this particular tax levy.
The concern with this is that given the IHT rate is 40%, wealthier people may not be willing to pay this rate on assets that may have been acquired before they had connections to the UK. This therefore may result in them leaving the country, especially in light of the planned transition to a residency approach to IHT.
The prior Conservative government had already put in place a phasing out of the non-dom status over time. Labour however, intend to move quicker to end the relief on foreign earned income. They're proposing to eliminate the current policy whereby exiting non-doms are only subject to income tax on 50% of their foreign income received in the first tax year, 2025/26, in the new regime.
Rachel Reeves plans to increase the tax on private equity bonuses, by upping the rate on carried interest transactions. This occurs when investors retain an amount of gains made on successful deals so that they are then taxed at the 28% rate of Capital Gains Tax rate. as opposed to under income tax principles and rates. The Chancellor's plans are to increase the levy to match the marginal rate of income tax at 45%. But could this then see dealmakers seek more efficient tax regimes abroad?
There is an existing windfall tax on energy profits from extracting oil and gas. The levy originally started at 25% in 2022, then increased to 35% in 2023 and was set to remain in place until March 2029. Labour are looking to extend the levy by a year to 2030 and increase it to 38%, bringing the total headline rate of tax on oil and gas profits to 78%.
There is a commitment not to increase the rates of Income Tax, National Insurance, and VAT. The key word above in relation to income tax is, ‘rates'. This does not necessarily mean that income tax will not increase! The rates of income tax can remain the same, but thresholds and bands could alter, meaning income tax could still be increased, whilst retaining rates as they currently are.
Some tax hikes have been ruled out, other taxes have been left potentially on the table in that the Labour leadership didn't mention them when campaigning. Paul Johnson, of the Institute of Fiscal Studies (IFS), has stated that Labour's declared tax-raising plans are "trivial" considering its ambitious proposals.
Johnson claims the £17.5bn to be spent on its 5 year "green prosperity plan", will simply add to the tax revenue pressures it already faces to increase spending on public services. Fiscal rules will need to be altered in his opinion so that the new government can find more money from tax. These are some of the areas and ways they may look to achieve this, predominantly through the taxation of wealth:
Could the government raise the Inheritance Tax rate to 50%? Other potentially obvious areas of change could be to restrict, or remove:
Planning could be absolutely essential in relation to any future announcements in these areas.
The Chancellor doesn't appear to have much room for manoeuvre when it comes to Capital Gains Tax (CGT). The annual CGT tax free allowance was halved to £3,000 as recently at 6 April 2024. Might CGT rates therefore rise to be brought in line with income tax bands?
For reference the current income tax and CGT rates are included in the table below.
| UK Income tax 2024/25 |
Capital Gains Tax 2024/25 |
||
| Tax band |
Tax rate |
Tax band |
Tax rate |
|
Personal allowance Income up to £12,570 |
0% |
Annual allowance Gains up to £3,000 |
0% |
|
Basic-rate Income of £12,571 - £50,270 |
20% |
Basic-rate Gains of £3,001 - £50,270 |
10% |
|
Higher-rate £50,271 - £125,140 |
40% |
Higher-rate / Additional-rate £50,271 + |
20% |
|
Additional-rate > £125,140 |
45% |
|
|
One potential option that's been mooted relates to how CGT interacts with IHT.
CGT isn't typically applicable upon death, unlike IHT. When assets are inherited, and where there have been gains in their value, the uplift is essentially cancelled! Instead, the value of the asset is determined at the time of inheritance when it comes to future potential gains, as opposed to when the asset was initially purchased. This is commonly referred to as 'death uplift'.
Moving forward the new government could look at potentially charging estates both taxes. This could result in assets such as paintings, shares, or antiques that are passed to beneficiaries incurring a CGT charge where there are gains in their value. Estates would therefore face a double tax charge.
9. Pension savings
The return of the Lifetime Allowance (LTA), the LTA referred to the total amount you could hold in a pension before any excess was subjected to taxation. Former chancellor Jeremy Hunt's scrapping of the LTA, in the Spring Budget 2023, lead his Labour counterpart, Rachel Reeves, to state she would reinstate it.
The challenge for the new government is this is anything but easy to do. The Conservatives got rid of it partly due to the LTA putting off senior doctors and other public sector workers from continuing to work beyond retirement age.
Re-introducing the LTA is likely to mean creating transitional, protection legislation to accommodate people investing more in their pensions in the interim period when there was no LTA in place. Otherwise, these people could face a tax charge before they access their savings, if the LTA is to be re-introduced. That may seem quite unfair.
Could the LTA be brought back at its 2022/23 level, or a higher one that accounts for inflation and the above issue? As is often the case with pensions, this could get complicated.
Higher-rate tax relief on pension contributions, putting your money in a pension results in it being topped up at your marginal rate of tax. This means if you're a higher rate tax payer in the 40% bracket, every £60 you pay in is increased to £100 going into your pension.
This is expensive for the government and could be an obvious area for legislative reform. There has been speculation that relief on contributions could be limited to basic rate tax relief only. This comes with consequences in that it would impact on public sector staff who have defined benefit pensions. Higher rate earners in defined benefit schemes would either end up paying a lot more in tax or see their pension benefits reduce significantly so that the scheme can pay the tax.
Importantly, frozen income tax bands that were introduced back in 2021 have resulted in fiscal drag taking effect. There are now many more higher rate 40% taxpayers in both the private and public sectors than there were 5 years ago. Any changes in this area would again require a lot of pre-planning.
The Resolution Foundation has proposed a cap of £100,000 as the total amount of money that can be saved in Individual Savings Accounts (ISAs).
ISAs are popular and placing limits on them could prove politically risky. However, the biggest issue is how this would be implemented. If a total cap is introduced will this result in changes to the annual contribution cap of £20,000?
What happens to savers who are already over the limit? What happens to those that exceed the limit, only to then go back under it? Stocks and shares ISAs for example with the investments they contain going up and down in value, could be particularly vulnerable to this. How will this all be tracked and policed?
Council tax is levied based on the value of your property, but the values used are those calculated back in 1991, the last time properties were revalued! It is said this was a significant exercise and individual properties weren't visited. This could therefore be an obvious area for change albeit the revenue is collected locally and not at central government level.
Wales may point to where this tax could head. There, they have a higher council tax band for larger properties.
As mentioned earlier, this post is largely speculative in nature. No official policies have been put in place at the time of writing. It's difficult to know which policies, if any, the new government will implement. The state of the nation's finance's and a recent history of anaemic growth make tax rises look quite likely. With this in mind it's always wise to:
The content of this post was created on 04/07/2024 and updated on 19/08/2024.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
leave a comment -