Daily Mail 30.10.2024 - Keir Starmer Plans to Eat Your Tax-Free Cash… With Fava Beans and a Nice Chianti!
Yes, Labour has made it clear changes are coming. Just last week, Rachel Reeves stated, "Unless you put Britain on a stable economic financial path, we’re not going to be able to get that investment in. That means there will be some difficult decisions, including on taxation. Businesses get that.*"
*Prediction - “They must be taxing businesses then.”
Labour’s manifesto has set certain tax commitments in stone. They’ve pledged not to increase Income Tax, National Insurance, or VAT on working people. Last week they added Corporation Tax to that list.
These promises have caused a whirlwind of speculation, as everyone tries to figure out where they plan to raise the funds necessary to plug the gaping fiscal holes without breaching these commitments.
Rachel Reeves has tied her own hands, now she needs to juggle.
This self-imposed restraint has led to every niche of the tax system being scrutinised as potential collateral damage.
"They must be taxing pensioners then.”
The Sound Of Silence
One of the notable differences between this Labour government and previous Conservative ones is the lack of leaks surrounding Budget plans.
In the past, we were privy to the contents of the Budget, sometimes weeks before the big day.
This time, there have been no pre-Budget consultations, no strategic leaks to the press, no reassurances to business leaders - just radio silence. And in that silence, the rumour mill has thrived.
Almost every conceivable tax reform has been reported on:
"Capital Gains Tax Set to Soar!"
"Inheritance Tax Overhaul Imminent!"
"Pension Tax Relief in the Crosshairs!"
"Will ISAs Be Scrapped?"
"Labour Are After Your Tax-Free Cash!"
In the absence of anything official, journalists have taken to the familiar line of questioning, "Will you rule out taxing breathing?", which inevitably leads to headlines like "Minister Refuses to Rule Out Taxing Oxygen."
Prediction - "They must be taxing everyone then."
A few hints have trickled out via back channels.
The prospect of adding employer National Insurance to pension contributions has seemingly been put to bed - presumably after someone realised the Government is the UK’s largest employer.
Just last week, HM Government's MoneyHelper website was updated with warnings to the public not to rush into taking tax-free pension cash in response to speculative news reports.
While it would be helpful if they could come out and squash all of these rumours, doing so would merely intensify the barrage of questions aiming to draw further comment - an ever-decreasing circle until all that's left are the inevitable changes.
It's a classic case of "damned if you do, damned if you don't."
I appreciate this level of secrecy. I'd much rather they were chained to their desks, desperately trying to come up with the best possible solutions of raising the £22/40bn, rather than scurrying off to their favourite hack in a game of first amongst equals.
My Top Prediction - Expect The Unexpected
While the speculation has centred on well-trodden tax topics, I have a feeling Labour will pull something entirely out of left field - something no one has predicted.
We should be ready for a surprise.
That said, I believe there are some obvious starting points for potential changes:
Increase to Employer’s National Insurance Contributions
This would be a stealth manifesto breaker. Raising employer National Insurance would generate substantial revenue, and it’s a way to tax businesses without directly increasing the taxes of working people.
However, let’s not kid ourselves here - although it’s framed as a tax on business, it’s mostly the employees who end up shouldering the cost through reduced wage increases or even less generous benefits packages.
Businesses don't just absorb these extra costs; they pass them down the line. So while Labour can argue that they're not increasing personal taxes, the reality is that working people will still feel the pinch in one way or another.
Changes to Pension Death Benefits
This one is a no-brainer and wouldn't cause too much uproar.
As it stands, if you die before the age of 75, your pension fund can pass to your beneficiaries tax-free. However, if you’ve already taken tax-free cash, any remaining funds are taxed when you draw them. This inconsistency doesn’t make much sense and could easily be reformed.
To be clear, I don’t mean pension funds will be subject to IHT. That change won’t happen - pensions are trusts and therefore subject to a whole different set of rules and legislation.
Adjustments to Inheritance Tax
Rather than just tinkering with the nil rate band, I can see them implementing broader changes here.
They could start by scrapping the complicated residence nil rate band and extend the period for potentially exempt transfers from 7 to 10 years, simplifying the system while potentially bringing in more revenue.
The broader change I fear will be the introduction of a wealth tax in place of IHT. This has the potential of seeing tax drip in annually rather than at a single point at death, usually after significant IHT planning has taken place.
Reforms to Capital Gains Tax
While I don’t think they’ll align CGT with income tax, as some reports have suggested, I do see them aligning it more closely with the current higher rates applied to property - 18% and 28% - instead of the lower 10% and 20% rates that apply to other assets.
I think most would settle for this.
Breaking a Manifesto Promise?
There’s a strong chance that Labour may end up breaking one of their manifesto pledges.
They could argue it was written before the true scale of the black hole became clear; desperate times call for desperate measures.
As I argued above, an increase to Employer’s National Insurance would be a prime example of this. While Labour may avoid directly raising personal taxes, an NI hike is effectively a tax on working people in all but name.
When it comes to Income Tax and VAT, they might well stick to their promise not to raise the rates, but that doesn’t mean they won’t move the goalposts.
Adjusting tax thresholds or expanding what’s chargeable to VAT can achieve the same outcome, without technically breaking a pledge. We’re already seeing this with proposals to add VAT to private school fees.
In the same vein, I would welcome vaping products being taxed in line with cigarettes. Currently, they’re subject to VAT at the standard 20%, this could be raised to match the taxes on cigarettes, where 80% of the cost of a pack is made up of taxes.
I’d rather go back to pubs smelling of cigarettes than be subjected to the streets smelling of watermelon.
Finally, there’s Income Tax itself. A long-overdue simplification is needed.
The current system claws back the personal allowance when earnings hit £100,000, which is unnecessarily complex.
Scrapping this and lowering the threshold for the 45% rate could increase the overall tax take while being spun as a move towards fairness and simplicity.
What Labour's Manifesto Actually Says
While the media stirs panic with personal tax headlines, the actual proposals in Labour's manifesto are far less sensational, but potentially more impactful - if you can stay awake long enough to read them.
Abolishing Non-Dom Status
They plan to scrap non-domiciled taxpayer status, ensuring that those who live in the UK pay taxes here.
Tackling Inheritance Tax Avoidance
They aim to close loopholes, especially offshore trusts, to ensure the wealthy pay their fair share, without raising inheritance tax rates.
Closing Private Equity Tax Loopholes
They will target private equity firms, ensuring performance-related pay is taxed as income, not capital gains, closing a long-standing loophole.
These proposals may not generate dramatic headlines, but focusing on them could be a smart way to avoid post-Budget tax-raising uproar.
If they do raise significant revenue, it will leave little room for sensational soundbites, perhaps bringing us back to the days when the only Budget highlight anyone remembered was the increase in the price of a pint of beer.
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