What would Labour do?

Labour governments have traditionally been associated with higher spending and taxation.  Some of this relates to the 1970s when the then Labour government introduced very high top rates of income tax along with surcharges on unearned income. 

More recently, this has perhaps not been the case – you may recall that the first Tony Blair Labour government agreed to stick to the spending plans of the Conservatives.  The tax burden (measured by government receipts as a percentage of national income) barely increased from when Labour came to office in 1997 until it left in 2010.

By that stage, the public finances had deteriorated, primarily due to the impact of the Global Financial Crisis.  The coalition government of the Conservatives and Liberal Democrats then implemented a programme for government which prioritised restraint on public expenditure over borrowing or taxation.  The Conservative government from 2015 largely continued this approach.

This has meant that over the past 25 years, with various governments whether Labour, Conservative or the coalition, the UK tax burden remained remarkably level until very recently where it has risen significantly due to additional taxation, largely in order to fund the costs of responding to the Covid pandemic.  It is safe to assume that taxes will not be falling in the short to medium term, irrespective of whatever party is in power.

It would therefore be inaccurate to describe a Labour government as being the architects of higher taxation, judging by fairly recent history at least.

The current Labour leader, Sir Keir Starmer, has been criticised for being too vague regarding the policies that his party would include in its manifesto for the next election. 

We can however look at what Labour has said in public statements and exchanges in the House of Commons to try to identify what areas of taxation policy it may want to focus on if it gains power.  Sir Keir has highlighted the current high burden of taxation and the implications this is having for ordinary people.  Rather than impose general tax rises which raise significant revenue for the government, it is likely therefore that any tax rises will be targeted.

One area that looks like it will be reformed under Labour is the taxation of individuals who are not domiciled in the UK.  It is currently possible for individuals who were not born in the UK (or whose parents were perhaps not born in the UK) to retain a domicile outside the country even though they may be UK tax resident in the UK – these individuals are then not domiciled in the country (referred to as “non doms”).

Anyone who is not domiciled in the UK has the opportunity to only pay UK tax on income and capital gains arising in the country or remitted to the UK.  Therefore, if they have income and gains arising elsewhere in the world, they are not required to pay UK tax unless they actually remit this income to the country.  Labour sees these provisions as unacceptable whereas the Conservatives consider that they are useful for attracting international High Net Worth Individuals and entrepreneurs to the UK.

It is therefore likely that a Labour government would seek to abolish the non dom provisions so that  individuals who are UK tax resident would then pay UK tax on all worldwide income and gains, irrespective of their domicile. 

Another area for change that Labour may have a focus on is removing the current VAT exemption for private school fees so that fees would then be subject to the standard rate of VAT which is currently 20%.  In conjunction with this, it is likely that Labour will also seek to curtail the ability of private schools to register as charitable organisations, unless they have some special purpose.

The abolition of the pensions lifetime allowance announced by the Chancellor in March was quickly criticised by Labour who vowed to reverse this if the party were in power.  The reality is that it would be complex to simply reinstate a lifetime allowance.

A final area that Labour is likely to implement changes is in the taxation of private equity executives who can receive some of their reward as capital gains, rather than income.

We would often get queries from clients about whether the rates of capital gains tax are likely to increase.  A number of years ago a report from the now abolished Office of Tax Simplification had recommended that capital gains tax rates should increase to align more closely with income tax rates.  This was not acted upon by the current government but may be an easy step for a new Labour government to take; a relatively small number of taxpayers ever pay capital gains tax.  Increasing capital gains tax would also allow Labour to target “those with the broadest shoulders”.

An emerging area of taxation policy which any government will have to consider going forward is climate change and whether additional taxes should be levied to discourage emissions and  incentivise investment in green technologies.  In its recent “Stronger Together” publication, Labour has outlined that it would spend £28 billion per annum in green energy projects for 10 years, with public investment seeking to attract private investment.

With the current UK taxation burden already being at a historically high level, and forecast to grow further, a Labour government would not find it easy to raise significant further revenue from taxation.

So, what will Labour actually do? Well, that remains to be seen but the expectation that the party is intent on introducing widespread tax increases (particularly to income tax) is likely to be misplaced. Instead, it is anticipated any tax policy changes will be highly targeted to previously announced measures along with steps to address climate change.