The Labour Party has been elected with a promise not to raise taxes on ‘working people’. With a fiscal plan based on increasing tax revenue by over £8.5 billion a year by the end of the parliament (shown below), this leads to questions about where the extra tax will come from, and who is likely to pay more.
The first Labour Budget for over 14 years is not likely to be until October, as the Office for Budget Responsibility must be given 10 weeks’ notice. In the meantime, based largely on Labour’s manifesto, these are the key changes we’re expecting.
Income tax
Labour has pledged not to raise income tax, however it has also said that it’ll keep income tax thresholds frozen until April 2028. This will result in more people paying more tax, because as their incomes rise, a higher proportion of their income will be taxed, and more of what is taxed will fall into higher tax bands.
One group who may be more significantly affected by a Labour proposal concerning income tax is private equity fund managers. Under what Labour describes as ‘closing a loophole’, the carried interest of private equity fund managers which is currently charged to capital gains tax (CGT), will instead be charged to income tax. However, the new Chancellor of the Exchequer, Rachel Reeves, has said that there might still be circumstances where capital gains treatment still applies if private equity managers are “putting their own capital at risk”.
Example
Ellie is an additional rate English taxpayer and receives carried interest of £500,000.
If the interest is taxable as a capital gain Ellie will pay CGT of £140,000 (28% on £500,000).
If the interest is instead taxable as income Ellie will pay income tax and National Insurance of £235,000 (45% tax and 2% National Insurance on £500,000).
Capital gains tax
Labour made no promises on capital gains tax (CGT) in its manifesto although during the election campaign Sir Keir Starmer did guarantee that under a Labour government people selling their main home would not pay CGT.
Starmer’s refusal to rule out raising CGT has led to speculation that CGT could be increased, although he’s said that: “All of our plans are fully funded and fully costed and none of them require tax rises over and above the ones that we’ve already announced”.
Non-doms
Before the election had even been called, the Conservatives had used the 2024 Spring Budget to announce significant reforms to the non-dom tax regime from April 2025 – changes that Labour had already been planning. The changes proposed by the Conservatives haven’t yet been legislated and it’s expected that any draft legislation will be rewritten to incorporate Labour’s proposals to “abolish non-dom status once and for all, replacing it with a modern scheme for people genuinely in the country for a short period.” For more on the potential changes see our articles on Potential tax changes for non-doms and Non-doms and Gift with Reservation of Benefit.
Inheritance tax
The one mention of inheritance tax (IHT) in Labour’s manifesto promises an end to “the use of offshore trusts to avoid inheritance tax”. While accepting that there can be many legitimate and legal reasons to set up an offshore trust structure, Labour’s proposal appears to be based on a 2018 report commissioned by the previous Conservative government which found that protecting assets from tax was one of the main reasons for using offshore trusts.
IHT is another area where there is wide speculation that there could be significant reform. Possible changes include making agricultural property relief and business property relief less generous. The starting point for any changes could be a consultation in the autumn.
VAT
One of Labour’s key proposals is to end the VAT exemption for private schools meaning VAT would be applied to school fees. While initially Starmer had said that the change would be implemented “straight away”, more recently Reeves has said that the change would be made in Labour’s first Budget and wouldn’t be retrospectively applied. The change could be made in time for the term starting in January 2025 however it is perhaps more likely that the change will start from the 2025-26 school year starting in September 2025. It has been reported previously in the media that Labour believes it will be possible to retrospectively tax advanced payments. It’s not yet clear how this would be achieved under current VAT law principles.
For more on this proposal see our article on VAT on independent school fees: what you need to know which will be updated as appropriate once further announcements from the new Chancellor are forthcoming.
SDLT
If you’re a non-UK resident individual (for Stamp Duty Land Tax purposes) and you buy residential property in England or Northern Ireland you pay a surcharge of 2% on top of the SDLT rates paid by UK residents. Under Labour’s proposal the surcharge will increase to 3%.
Example
William is non-UK resident for the purposes of SDLT and buys a residential property as an individual in England valued at £2 million. William isn’t a first-time buyer and doesn’t have any other property.
Under the existing rules William would pay SDLT of £191,250 (being 2% on the first £250,000, 7% on the next £675,000, 12% on the next £575,000 and 14% on £500,000, being the balance above £1.5 million).
Under Labour’s proposals, and with everything else remaining the same, William would pay £211,250 (being 3% on the first £250,000, 8% on the next £675,000, 13% on the next £575,000 and 15% on £500,000, being the balance above £1.5 million).
Business tax
Within six months we’re expecting the government to publish a roadmap for business tax, setting out key policy details for the expected five years until the next election with the proposed aim of helping “businesses to plan investments with confidence”.
We also expect clearer guidance to help businesses understand what expenditure qualifies for full expensing and the annual investment allowance.
Windfall tax
On the Energy Profits Levy charged on the profits of oil and gas producers Labour has pledged to:
- Extend the levy until the end of the parliament,
- Increase the levy by three percentage points, and
- Remove oil and gas company investment allowances.
Tax avoidance
Most of the proposed increase in tax revenue is set to come from reducing tax avoidance. Under Labour’s plan to close the tax gap, it proposes to: increase HMRC compliance activities (including recruiting and training an extra 5,000 staff); invest in technology transformation in the tax system; and make legal changes to ensure there’s a genuine deterrent to tax evasion. Labour also says it’ll consider widening the scope of schemes that are reportable under the disclosure of tax avoidance schemes (DOTAS) rules and strengthening HMRC’s ability to make taxpayers under investigation pay the tax HMRC consider to be owed.
One Budget a year
Labour has committed to “one major fiscal event a year, giving families and businesses due warning of tax and spending policies”. Based on this, and an earlier statement that said there would be “One Budget every autumn, at least four months before the new tax year”, we’re expecting major tax announcements to only be made annually each autumn.
If you want to know more about how any of these prospective changes will affect you or your business please contact us.
