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The United Kingdom’s general election, held on Thursday 4 July 2024, resulted in a comfortable majority in the House of Commons for the Labour Party under Sir Keir Starmer’s leadership.
The United Kingdom’s general election, held on Thursday 4 July 2024, resulted in a comfortable majority in the House of Commons for the Labour Party under Sir Keir Starmer’s leadership. The Labour Party’s political manifesto, first published on 13 June 2024, sets out the tax and public spending policies which they intend to deliver for the British public now that they have been invited to form a new government.
The manifesto needs to be considered in the context of the UK’s current economic climate. The Labour Party have committed to stabilise, and subsequently, reduce debt as a share of national income. In an economic climate of relatively low real economic growth and high debt interest costs, economists note that this commitment will place some restraints on the government’s ability to either increase public spending or cut taxation. This is, perhaps, why we saw suggestions from the main parties, including the Labour Party, that substantial amounts of additional revenue could be found through various initiatives to close tax avoidance loopholes and improve tax administration processes. The amounts of additional revenue that the main parties expected to raise in this manner appeared optimistic, but the Labour Party’s figures were perhaps the most realistic at £5.23bn. The viability of the new government’s manifesto pledges will, nonetheless, rest on continued economic growth in line with Office for Budget Responsibility (OBR) forecasts on the basis that the Labour Party’s proposals are being cast as “fully funded”. In light of how the Labour Party have committed to not increase a number of key taxes, it remains to be seen whether they are approaching the current fiscal climate with sufficient caution given the obstacles they are likely to face.
We have provided a summary of the key tax proposals within the Labour Party’s manifesto, together with some brief comments from our experts in our private client and business & corporate tax teams, below.
The Labour Party’s manifesto pledges on personal tax were not exceptionally developed nor extensive. The Labour Party have however committed to not increasing national insurance contributions (NICs) or the “basic, higher, or additional rates” of income tax.
The manifesto confirms the Labour Party’s previously announced proposal to fully abolish non-UK domiciled status and eliminate the opportunities available to avoid inheritance tax through the use of offshore trust structures. There is, however, limited information as to how a new “modern scheme for people genuinely in the country for a short period” might be structured and how it might differ from the Conservatives’ replacement non-UK domiciled regime announced at the Spring Budget 2024.
It had previously been announced that proposals would be put forward to close the carried interest loophole whereby certain performance-related incentives given to private equity executives are subject to capital gains tax, at an enhanced rate of 28%, instead of income tax. The inference appears to be that the Labour Party intends to tax all carried interest as income, but there are no further details on how the party might approach this from a policy design or technical perspective.
Whilst there is currently no firm suggestion that the Labour Party would seek to increase personal taxation, the wording in the manifesto does not completely exclude changes to the personal tax system. The Labour Party’s confirmation that they will not increase the “basic, higher, or additional rates” of income tax does perhaps allow them to tinker with other aspects of the income tax system, such as adding new rates, changing the thresholds or extending the current freeze on the thresholds. Whilst the manifesto pledges not “to increase taxes on working people”, ancillary comments made by senior Labour Party figures indicate that this pledge may not extend to exclude changes to the taxation of savings and/or investment income. There is similarly no clarity on whether the commitment not to increase NIC rates will also extend to employer NICs. In addition, as they have not explicitly ruled out any increases to capital gains tax or inheritance tax, the door has been left open on that front. This does, therefore, perhaps give the Labour Party some fiscal headroom to manoeuvre, but also means that there is some uncertainty for taxpayers as to what changes may come in the future.
We are still not clear on how the Labour Party will diverge from the current proposals put forward by the Conservatives on the taxation of non-UK domiciled individuals. The Labour Party have clearly indicated that they will go further than the Conservatives on the non-dom changes, which will include taking a firmer stance on offshore trusts and the closing of perceived “loopholes” but it is not currently clear what, in practical terms, this would entail. The detail will be crucial here – the changes will have a significant impact on a small but highly mobile population whose behavioural response will affect the estimated tax raising impact of Labour’s plans.
Labour’s approach to changing the taxation of carried interest will need to be further substantiated for us to develop an understanding of the approach the party intends to take. The proposal has, however, been subject to some interesting public and academic debate. The Labour Party believe that this will raise around £500m per annum in the first five years but the Financial Times have reported HM Treasury estimates indicating that the UK economy could be £3.3bn worse off by 2029 if the policy is pursued. Commentators have raised concerns that changes to the taxation of carried interest in the post-Brexit landscape may result in the UK becoming an uncompetitive jurisdiction for fund managers. Despite these concerns, the ultimate effect will completely depend on the design of any reform so we will need to wait and see how this policy takes shape.
The Labour Party manifesto includes a pledge not to increase corporation tax above the current level of 25%, with a suggestion that the party may be willing to take necessary steps “if tax changes in other countries pose a risk to UK competitiveness”. The party will also retain full capital expensing, together with the annual investment allowance, as introduced by the former Conservative government.
The party have, however, proposed the complete replacement of current business rates with an alternative system, although the design of this new system is not specified in the manifesto. The party also intends to extend the sunset date of the windfall tax on oil and gas companies (known as the Energy Profits Levy) until, at least, the end of the next parliamentary term, increase the levy rate by 3%, and facilitate changes to some of the allowances and mechanisms.
