Labouring over taxes – what to expect from the UK’s election outcome

With the next general election taking place on 4th July 2024, the UK may be on course for a new government. As the political landscape evolves, the possibility of a Labour victory raises questions about potential shifts in taxation policies. The important question which is front of mind is what potential financial planning implications we might see resulting from a change in government. 

While specific details are subject to change, the Labour Party has traditionally focussed on social justice and addressing income inequality, which often involves reforms to the tax system. Here, we consider some potential tax changes that could be on the horizon if Labour secure a win at the upcoming UK election.  

Potential income tax reforms  

Labour has historically advocated a fairer distribution of the tax burden. Potential income tax reforms could involve the introduction of new tax brackets or adjustments to existing ones, with a focus on raising revenue from those who can afford to contribute more. However, whilst Keir Starmer previously pledged to increase the top rate of income tax (45%) in 2010, Labour has subsequently rowed back on this proposal. 

Rachel Reeves, Shadow Chancellor, has made several recent statements asserting the Labour Party does not have plans to increase income taxes or introduce a wealth tax, as the party does not believe the path to greater prosperity is through higher income tax. This has been a welcome announcement for higher rate taxpayers.  

Is Capital Gains Tax on the agenda? 

There has been much speculation surrounding Capital Gains Tax (CGT) and whether a change to the CGT regime may be included within the UK Labour Party’s election manifesto. Whilst Rachel Reeves previously indicated that Labour has ‘no plans’ to equalise rates to align Capital Gains Tax with Income Tax rates, this does not rule out the possibility of rate increases to align the taxes more closely. This is a significant area for potential reform and will be closely watched by investors, as a change to Capital Gains Tax will materially impact the tax burden realised from the sale of not only investments, but also real estate and business assets, amongst others.   

From a planning perspective, taxpayers faced with uncertainty over future tax rates may look to plan for the most unfavourable scenario and realise gains sooner than previously anticipated at what might be considered a more favourable tax rate. Alternatively, investors may choose to retain assets longer term, or indeed reinvest gains in qualifying assets with a view to rolling the gain over into the future. 

Pension legislation – an easy target? 

The budget announcement in March 2023 regarding the abolishment of the Lifetime Allowance (LTA) was a welcome surprise for investors, removing the limit on the amount of cumulative pension savings that can be drawn by individuals without incurring an additional tax charge.  

Whilst Labour initially took a firm stance against this, indicating their intention to reintroduce the LTA if successful in the next election, the party has subsequently softened its stance, stating that reintroducing the LTA would be far from straightforward and the practicalities of doing so would be exceptionally difficult. The repercussions of doing so could also result in the early exodus of senior NHS doctors and other individuals with large defined benefit pension schemes, who may look to retire early in an effort to avoid large tax charges. 

Changes to the LTA have previously been introduced in conjunction with some form of protection for those who would otherwise have been adversely impacted. Therefore, in the event that Labour reassesses or fully reintroduces the LTA, it is possible protection may be afforded to those who would otherwise face tax charges.  

The uncertainty over the possible reintroduction of the LTA has raised the question of whether some investors should consider crystallising their pensions earlier than otherwise planned in an effort to avoid potential ramifications should the LTA be reintroduced in its current form. Nevertheless, it is important to keep in mind the tax benefits associated with retaining investments within a pension wrapper, specifically the exemption of pensions from inheritance tax. Crystallising a pension with the sole purpose of avoiding a potential LTA charge may negatively impact your overall inheritance tax position and it is therefore imperative that these factors are taken into consideration when discussing your overarching objectives with your Wealth Manager.   

Inheritance tax – to scrap or not to scrap? 

Inheritance tax revenue has steadily increased over the last 20 years, with receipts in the 2022-23 tax year increasing to £7.1bn.  

It had been reported that the Conservative Party was considering scrapping inheritance tax entirely as a potential vote winner. However, a removal of inheritance tax in its entirety now seems to be off the table, given the potential backlash, the loss of revenue it would entail, and the relatively small number of voters it impacts from an overall perspective.  

Labour has been firm in its views on inheritance tax, stating that it does not believe tax cuts for the very wealthy are the way forward. Some form of inheritance tax reform remains possible, but whether this involves revising the current exemptions, taxing inherited capital gains differently, or otherwise, remains to be seen. Should Labour win the upcoming UK election, we may see other tax reforms at the forefront of any changes in an effort to provide the public with immediate relief. 

Corporation tax 

Although not strictly a personal taxation point, corporation tax can significantly impact the way in which individuals choose to structure their wealth.  

Despite rejecting calls to cut corporation tax, in an attempt to provide businesses with some certainty, Labour has recently pledged that it will not raise corporation tax above its current rate of 25%. Instead, statements from the Shadow Chancellor indicate that Labour will favour investment allowances over a lower corporation tax rate. Making larger corporations ‘pay for their share’ has proved to be a popular message among voters.  

Summary 

The upcoming UK general election may result in a number of potential tax reforms, and we will get more detail once the manifestos become available in due course.

It’s essential to note that potential tax changes remain speculative, and any adjustments to UK tax legislation will depend on Labour’s policy proposals, the possibility of a hung parliament and the broader political and economic context at the time of the election. As the political landscape evolves, we will be keeping a close eye on the party manifestos and policy announcements which will provide a clearer understanding of the potential impacts of a Labour victory.  

In any event, having a long-term financial plan and actively keeping this under review will be key to preserving wealth and ensuring robust financial outcomes, both now and long into the future.