Speculating on Potential Labour Budget
Published / Last Updated on 18/06/2024
The Labour Party manifesto was published last week and given the consistency of the party’s lead in opinion polls; it is more than likely the Labour will be elected to govern on 4th July. Given this, there is much speculation on what will be in Labour’s first Budget and when will it be.
Firstly, Rachel Reeves MP (Shadow Chancellor) has said there will be no emergency Summer Budget, so we are more likely to see an Autumn mini-budget Autumn Statement and then a full Budget in March 2025. There may be no rush but there is plenty of speculation. To try and predict the contents of any budget is impossible but at this stage, we can only use the Labour Manifesto as our guide.
In its manifesto (page 5), Labour said “Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.” The clue here is “working people”.
Labour has been pressed to define “working people” as many suggest this means that those with non-working income will be taxed on unearned income, by this we suspect changes to:
- Property Rental Income: they may create different tax rates as property income is in a different tax schedule to earned and self-employed income.
- Dividend Allowance: the first £500 of dividends are tax free using the dividend allowance. This could be scrapped for all or even just for higher rate and additional rate taxpayers.
- Dividend Income: Dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). It is no great ‘leap’ to tax dividend income at normal rates of income tax i.e., 20%, 40% and 45%.
- Savings Allowance: Basic rate taxpayers receive the first £1,000 interest on cash savings tax free. Higher rate taxpayers get the first £500 interest tax free. Again, it is no great ‘leap’ to reduce the allowance or basic rate taxpayers and abolish it for higher rate taxpayers.
- Capital Gains Tax on property investment: Capital gains tax allowances have been reduced to £3,000. It is again no great leap to abolish the capital gains tax allowance entirely. In addition, capital gains tax rates on property are 18% for basic rate taxpayers and 24% for higher rate taxpayers. It could be very simple to align capital gains tax rates with income tax rates meaning we all pay capital gains taxes at 20%, 40% or 45%.
In all of the above, you will note that these changes do not affect ‘working people’ and do not change basic, higher, or additional rates of Income Tax, or VAT.
Just this week, Keir Starmer also appeared to define "working people" as those that are working but with little or no savings. We guess savers are going to be hit with a reduction or loss in tax free savings and dividend allowances as mentioned above.
New Income Tax Bands?
Scotland has already set a precedent in that it has income tax bands of: Starter Rate: 19.00%, Basic Rate: 20.00%, Intermediate Rate: 21.00%, Higher Rate: 42.00%, Advanced Rate: 45.00% and Top Rate: 48.00%. Again, it is no great leap to introduce new tax bands such as a new, lower Starter Rate plus a higher Top Rate of income tax, like Scotland and Labour would also have kept their manifesto promise to keep UK basic, higher, or additional rates of Income Tax the same.
Pensions
On page 29 of the manifesto, Labour has committed to “undertake a review of the pensions landscape”.
We know that George Osborne, as Chancellor back in 2015 planned a full pension market review (until the Brexit vote pushed it back down the priority list). This research/work by the Treasury will not have simply been thrown away. There was talk then and there will be speculation now that tax relief on pension contributions may be restricted to basic rate relief only with no additional relief for higher rate and additional rate taxpayers. The Conservatives abolished higher finance expenses relief on investment property mortgages by restricting it to basic rate relief only even if you are a higher rate or additional rate taxpayer. We see a change to how much tax relief is granted for pension contributions being restricted to basic rate relief only.
Tax Breaks
There are over 1,000 different tax breaks in the UK tax system. Labour has committed to review each and everyone. It has already committed to adding VAT to Private School Fees, it is no great leap to add VAT to other non-vatable services without increasing the VAT rate.
Speculation
We know the above is speculation but both we and the Labour Party must start somewhere. There will be more taxes paid by middle Britain and higher income/asset rich people but we suggest there will be no rush to do this until inflation falls and interest rates fall.
