Labour Party's Tax Policies

With the landslide victory of the Labour Party and Sir Keir Starmer taking office in number 10, there are likely many changes due. The cost-of-living crisis and small businesses being stretched further and further over the recent years, what policies on tax can we expect to see from this new government?

Tax increases?

We can enjoy the recent class 1 and class 4 National Insurance (NI) cuts of 2% and 3% respectively that were put in effect from 6th April 2024, but other methods of taxation have crept up on us over the years such as the reduction of dividend allowance. The dividend allowance as recently as 2018 used to permit tax free dividend earnings up to £5,000; this has slowly dwindled to a pathetic £500 meaning that small business owners will pay more tax on those earnings than a few years before.

The Labour Party insist that there will be no increase of income tax, NI or VAT. Does leave the door open, however, to increases in other forms of taxation such as the dividends allowance reduction. It is suspected that Capital Gains Tax (CGT) and Inheritance Tax (IHT) may be targeted for an increase.

It is said that the use of offshore trusts to avoid IHT will come to an end. The party have said they will consider increasing CGT rates in addition to altering the IHT system if elected. The CGT rate may be brought inline with income tax rates which can reach 45% for the additional rate.

One thing that is certain is that both the Labour and Conservative parties both pledged to freeze tax thresholds. With inflation this will effectively increase tax with each subsequent year.

VAT charge on private schools

Another change that will be rolled out is the VAT charges being applied to families who send their children to private schools. This will raise a negligible £1.5bn per year but may impact those middle-income families who dedicate that extra income they have to support their children.

HMRC set to receive significant investment

Anyone who has had to deal with HMRC will likely tell of a frustrating, lengthy and often inadequate experience. I have seen and heard of many individuals who have faces charges and penalties resulting from HMRC’s lack of haste in responding to critical issues.

The investment of £850m seeks to change and modernise HMRC to make them fit for purpose. The enrolment of Making Tax Digital (MTD) requires us all to digitise our tax affairs in the near future, yet it is HMRC that is playing catchup with their own initiatives and hoping to invest in better IT equipment in the near future.

The registration and reporting requirements are set to go through an overhaul, as well as increasing HMRCs powers to try to plug the tax gap – something which has been building up through non-compliance whether by tax evasion or through innocent errors and ignorance.

To summarise

Though no direct tax increases are promised, some households are set to be worse off with potential rises in CGT and other potential avenues of indirect taxation. The reporting requirements to HMRC are set to change and they will be given more powers to investigate in aims to reduce underpayment or avoidance of tax.

There aren’t a great deal of changes that have been officially announced by the Labour Party, especially compared to some others in particular. However this does not mean there are not many changes to come.