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How the election of the Labour government could affect tax policies in the UK
Introduction
The UK general election held on 4th July 2024 resulted in a historic victory for the Labour Party, which secured 412 seats in the House of Commons, forming a majority government for the first time since 2010. The Conservative Party, which had been in power since 2015, suffered a major defeat, losing 251 seats and falling to 121. The Liberal Democrats gained 63 seats and secured the third-largest party position with 71, while the SNP lost 38 seats, now down to 9, the Greens, and other smaller parties also made some gains.
The Labour leader, Keir Starmer, will become the new Prime Minister after being sworn in by the King, and is likely to announce his cabinet shortly after. He vowed to deliver on his campaign promises of ending austerity, investing in the NHS, tackling inequality, and addressing the climate crisis. He also said he would seek to renegotiate the Brexit deal with the European Union, which had been approved by the previous government but not ratified by Parliament, and put it to a second referendum.
However, the future of the UK’s economy and fiscal policy remains uncertain, as the new government faces several challenges and constraints. One of the key areas of interest for many taxpayers and businesses is how the Labour government will change the tax system, and what impact this will have on their income and wealth. Here, we will analyse the possible tax implications of a Labour victory, based on the information available today. We will focus on three main areas of taxation: income tax, capital gains tax, and value added tax.
Labour Income Tax Policies
Labour has pledged not to increase income taxes for the majority of taxpayers but has also hinted at some reforms to make the system more progressive and fair. Some of the potential changes could be:
- Introducing new tax brackets or adjusting existing ones.
- Focusing on raising revenue from those who can afford to contribute more. For example, Labour could reduce the £100,000 threshold currently in place before an individual’s personal allowance is reduced.
Capital Gains Tax
Capital gains tax (CGT) is the tax levied on the profits from the sale of assets, such as shares, property, or business interests. Labour has indicated that they have “no plans” to equalise CGT rates with income tax rates, which would mean a significant increase for higher and additional rate taxpayers. However, Labour could still raise CGT rates to align them more closely with income tax rates, or reduce the annual exempt amount, which is currently £3,000 for 2024/2025. This would affect the taxation of investment gains, property sales, and business disposals.
Value Added Tax
Value added tax (VAT) is the tax charged on most goods and services sold in the UK. Labour has promised not to increase the standard rate of VAT, which is currently 20%. However, Labour has also announced that they would apply VAT to private school fees, which are currently exempt. This would mean a 20% increase in the cost of private education and could have a significant impact on the affordability and demand for such services. A Labour victory in the election could bring some major changes to the tax system, especially for higher earners and investors. While some of the details are still unclear, it is important to be aware of the potential implications and plan accordingly. We have provided a summary of the main points to consider, but further guidance and advice may be needed depending on the individual circumstances. Speak to Cooper Associates Accountancy to ensure that you are aware of all the tax implications of political change and can make sure you are compliant and ahead of your future tax risk.
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