Labour’s first post-election Budget

Introduction

The Labour Party won an overall majority of seats in the UK General Election held on 4 July 2024 and so has formed a government. Labour’s first post-election Budget will be held on 30 October 2024. This is 117 days since Labour took office, which the longest wait for a new government to hold its inaugural Budget in over 50 years.  

Labour’s manifesto said that it was fully costed and fully funded. It contained £8.55 billion of additional tax to be collected per annum by 2028/29, largely from closing the tax gap (the difference between the amount of tax due and collected). However, since the election Labour have stated that there is a “£22 billion blackhole” in the nation’s finances. The Chancellor has said “I think we will have to increase taxes in the Budget”. At the Labour Party conference in September, she stated that the Budget will be for economic growth and investment. She is reported to have said that she will not bring in a new tax or a wealth tax.

This publication summarises what we do and don’t know about Labour’s key tax policies, based on their manifesto, other relevant documents and post-election remarks.  

Personal taxes 

Taxes on income 

Labour’s manifesto pledged that “Labour will not increase taxes on working people, which is why we will not increase National Insurance [or] the basic, higher, or additional rates of Income Tax…”. There has been debate about whether Labour considers that this pledge only applies to “working people” and, if so, who are “working people”? What about non-work income sources such as dividends or rental income? In her speech at the Labour Party conference the Chancellor omitted the working person point and simply said that Labour will not increase the rates of income tax and National Insurance Contributions (NICs).

The income tax pledge relates to rates, not thresholds. The personal allowance and the thresholds at which the higher and additional rates of tax become payable are currently frozen until April 2028, as are the comparable NIC thresholds. Labour may announce whether the freeze will end in April 2028 or be extended in the Budget or, theoretically, could change the thresholds.

Non-doms

Much is already known about how non-dom taxation will change as the Conservatives included measures in the Spring Budget 2024 with which Labour intend to proceed, albeit with some changes to the detail. Notably, Labour is considering what tax rate should be applied to remittances made under a temporary repatriation facility intended to encourage remittances to the UK and do not intend to proceed with a 50% exemption from tax on foreign income as a one-year transitional measure.

Inheritance tax changes are also to be made to both the taxation of individuals and trusts. Labour’s plans for trusts go further than the Conservatives’ plans, as Labour have stated that they intend for all offshore trusts, whenever set up, to be within the scope of UK inheritance tax. This pledge will need to be implemented in a way such that tax applies where there is a UK link.

Labour have confirmed that information on outstanding matters will be published at the Budget, as will numbers prepared by the Office for Budget Responsibility setting out the figures in relation to the non-dom changes and other Budget matters.

Carried interest received by the private equity industry

Changing the taxation of performance related carried interest payments from being within the scope of capital gains tax to being within the scope of income tax is a flagship Labour policy. It is costed to raise £565 million in 2028/29.

Labour consulted on the implementation of this change in the summer, with questions on how best to make the tax treatment reflect economic characteristics, market practice and approaches in other countries. A response is expected in the Budget.  

Capital Gains Tax (CGT)

Labour’s manifesto did not contain any CGT-related pledges other than the carried interest changes above, though during the election period (now) Prime Minister Sir Keir Starmer did say that Labour will not begin charging CGT on sales of family homes.

As there are no other CGT pledges, CGT rates and reliefs have been the focus of discussion. HMRC publish a ready reckoner containing estimates of how much tax they expect would be collected or lost across three tax years if various changes were made. Notably, it says that the amount of CGT collected would decrease in two of the three tax years if the higher rates of CGT increased by 5%, and in all three years if the higher CGT rates rose by 10%. Various different CGT rates apply, and the ready reckoner only provides a blanket estimate assuming an equal increase. The potential yield may vary for individual rates. It is also possible that the government could consider the extent to which reliefs should remain available.

If any changes are made they could take immediate effect from the Budget. There is precedent both for changes taking immediate effect and taking effect from the beginning of the next tax year.

Inheritance tax 

The only inheritance tax pledge included in Labour’s manifesto related to applying inheritance tax to offshore trusts set up by non-doms. No pledges were made about inheritance tax rates, reliefs or exemptions.

For individuals, inheritance tax can apply both during lifetime on chargeable lifetime transfers, such as most gifts into trust, and on death. Inheritance tax is only payable to the extent the nil rate band is exceeded. The nil rate band has been frozen at £325,000 since April 2009. A £175,000 residence nil rate band may also be available if an individual leaves their home to their children or grandchildren. Both bands are frozen until April 2028. Labour did not make any pledges about these bands.  

Various reliefs and exemptions are available, including for business and agricultural assets. HMRC statistics state that business relief cost £1.3 billion and agricultural relief £365 million in 2023/24. Labour have not commented on these reliefs, though may be considering them. A 2024 report by the National Audit Office on the cost and effectiveness of tax reliefs may be considered.  

Pensions 

Labour did not make any pension-related tax pledges. Pensions are a topic of speculation, notably with regards to tax relief on pension contributions, the retention of the inheritance tax exemption and the 25% tax free lump-sum, which is currently capped at £268,275. Tax reliefs related to pensions cost over £50 billion in 2023/24. Labour may be considering these reliefs.  

Furnished holiday lets 

The Conservatives announced that the existing tax regime for furnished holiday lets would be abolished with effect from 6 April 2025 and Labour published draft legislation to enact this change on 29 July 2024. An update may be published on Budget Day.

Employment taxes 

Employers’ National Insurance Contributions (NIC)

Labour have pledged not to increase NIC, though if the party considers that their pledge only applies to working people they may consider that it does not apply to employers’ NIC, as it is payable by the employer and not the employee. Sir Keir Starmer did not answer when asked whether both employee and employer NIC are included in the pledge in Prime Minister’s Questions on 9 October 2024. Labour did not make any specific pledges relating to employers’ NIC relief on pension contributions.

Apprenticeship levy and its replacement with a growth and skills levy

Labour’s pledged new growth and skills levy is intended to be more flexible than the apprenticeship levy, under which employers currently pay £4 billion to the Treasury annually. Due to restrictions employers can find it difficult to access all of the money they have paid into the levy account and so some of this money is unspent. Making it easier for employers to access funds is likely to come at a cost to the Treasury unless the 0.5% apprenticeship levy rate is increased. Details may be published in the Budget.  

Payrolling benefits

The Conservatives previously announced that payrolling of benefits would be made mandatory in April 2026, such that tax and NICs would be collected for employees at source. Labour are likely to proceed with this change. The Budget may include more details on the policy design, including whether the change will apply to all benefits in kind for all employers. Taxing benefits on a real-time basis should lead to more accurate collection of tax on benefits in kind in-year. However, payrolling can be difficult for some employee populations and benefits, and employers will be anxious to find out more about the policy design.

Umbrella companies

The previous government had consulted on employment rights and tax revenues where workers are engaged via umbrella companies. The response to the consultation has not yet been issued. Labour have pledged to reform employment rights generally and on 10 October 2024 published the Employment Rights Bill.  It possible that an update could be published on Budget Day to pick up the previous proposals to protect tax revenues. This could include new mandatory due diligence requirements for end users of labour, a right for HMRC to transfer any unpaid tax and NIC liabilities to end users or deeming the worker to be the employees of another party for tax purposes.

Business taxes

Business tax roadmap 

Labour pledged to introduce a business tax roadmap to give businesses the certainty needed to encourage investment and growth. The Chancellor has confirmed that the roadmap will be outlined at the Budget and that it will include capping the main rate of corporation tax at 25% for the remainder of the Parliament and retaining full expensing for plant and machinery. During the election campaign Labour pledged that they would give firms greater clarity on what qualifies for allowances to improve business investment decisions, so we expect that the roadmap will include broader commentary on capital allowances.

Labour have not yet provided further comment on what will be included in the roadmap, though did publish a document titled “Business Partnership for Growth” in February 2024 which set out Labour’s plans for supporting and encouraging businesses to grow. A key focus of Labour’s plan is certainty, including having a stable and predictable tax system, so we expect this to be a part of the roadmap. In the same document Labour also commented that they wish to trial greater use of advance rulings and clearances for major investment projects, so this should also be expected.  

Business rates 

Labour pledged to replace business rates with a new system, information about which may be in the Budget. This would be a big change so it is likely that we will see a consultation announced to either gather ideas for how a replacement regime should operate or to ask for comments on the operation of a replacement regime that Labour have designed in principle.

Energy Profits Levy 

On 29 July 2024 Labour announced that the rate of Energy Profits Levy, which applies to oil and gas companies operating in the UK, will increase to 38% from 1 November 2024 and that the levy will apply until 31 March 2030 (unless market oil and gas prices fall below thresholds based on historical averages). The announcement indicated that further details of upcoming changes will be in the Budget, including abolishing the levy’s main 29% investment allowance for qualifying expenditure incurred on or after 1 November 2024 and reducing the extent to which capital allowances can be considered when calculating levy profits. These changes are revenue raising and were costed in Labour’s manifesto as raising £1.2 billion in 2028/29.

Other business measures 

• The previous government consulted on potential reforms to transfer pricing, permanent establishment and the diverted profits tax rules. A summary of responses was published in January 2024 and the Conservative government had intended to continue engaging with stakeholders on its proposals with a view to publishing draft legislation in late 2024. Labour may comment on whether they intend to proceed with this in the Budget.
• Labour pledged to support the UK’s cultural industries. The Budget may include information on how this support will be provided, including in relation to business rates relief and a new visual effects relief which was announced by the Conservatives in the Spring Budget 2024.

Stamp Duty Land Tax (SDLT)

Labour pledged to increase the SDLT surcharge paid by non-UK residents who purchase residential property in England or Northern Ireland by 1 percentage point, increasing the charge to 3% of the purchase price. This is a revenue raising measure which is costed to raise £40 million in 2028/29. The surcharge can apply to any type of non-UK resident person, including both individuals and companies. The Budget could announce an increase in the surcharge, potentially with immediate effect.

Indirect taxes 

• Labour pledged not to increase VAT in their manifesto, as part of their taxes on working people pledge.
• Labour have already published draft legislation which, subject to enactment, will apply VAT to school fees paid on or after 29 July 2024 for terms starting on or after 1 January 2025. Separate draft legislation is expected in due course to abolish business rates relief for private schools in England from April 2025. Any Budget announcement is likely to be a reconfirmation of these changes going ahead.
• Fuel duty rates have been frozen for over a decade and the current temporary 5p cut is due to end in March 2025. We expect to hear what Labour’s plan is with regard to both the freeze and the cut in the Budget.
• At the Labour Party conference the Chancellor announced a package of reforms on improving the UK’s tax system, including announcing that a consultation will soon be launched on e-invoicing.
• Labour have not yet responded to calls to reinstate VAT-free shopping, nor on reviewing low value import duty relief.

Closing the tax gap

The tax gap is the difference between the amount of tax HMRC think is due and the amount of tax collected. HMRC’s latest tax gap figures for the 2022/23 tax year show a tax gap of £39.8 billion, which is 4.8% of the total tax which is thought to be due. 

In April 2024 Labour published a document titled Labour’s plan to close the tax gap containing Labour’s threefold plan to close the tax gap by (1) Boosting HMRC compliance activities, including hiring 5,000 extra compliance officers; (2) Investing in technology transformation (which Labour also says would “improve the customer experience”) and (3) Making legal changes, including “restoring a genuine deterrent to tax evasion and making sure people pay their taxes in the first place”.

These plans were confirmed at the Labour Party conference and we expect further information will be published in the Budget.