As part of their manifesto, Labour pledged that it would not raise “working taxes” however with the need to raise money fast, it has been speculated that Labour could now look at applying NI to employer pension contributions.
Ian Goodwin, Head of Employment Tax believes this change would be especially costly for those with Defined Benefits (DB) schemes, notably the public sector’s generous pension schemes. If these public sector pension schemes are protected from this change being introduced, it would create an even greater divergence between private and public sector pensions and costs.
We predict Labour will focus more on personal taxation. Changes to Capital Gains Tax (CGT), Inheritance Tax (IHT), Stamp Duty Land Tax (SDLT), Business Relief and the reformation of pensions taxation are all expected.
Labour has also confirmed it will limit the benefits available to non-UK domiciled individuals. The abolition of the current non-dom rules and replacement with a residence-based Foreign Income and Gains regime appears to be fairly certain but with talk of ‘watering down’ the changes, much still remains unknown around possible rebasing of assets, possible transitional rules and the implications for foreign trusts, all of which were proposed in the Conservative’s plan for the abolition of the non-domicile rules.
From experience, we believe HMRC will seek to undertake a greater number of audits concerning employer compliance, National Minimum Wage and VAT, with focussed scrutiny being applied to IR35 and R&D. In short, if an organisation has not had a review for the past five years, they should expect one shortly.
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To some extent, CGT has already been squeezed in recent years with reductions to the Annual Exemption (AE) and the Business Asset Disposal Relief (BADR) limit available on the disposal of trading businesses. However, speculation of an increase in rates is rife with a worst-case scenario of aligning CGT rates with those for Income Tax.
If this prediction comes true and we do see an increase in CGT rates, we would hope this is coupled with an increase in the current BADR limit of £1m.
Labour could also remove the CGT uplift available on death for assets that qualify for relief from IHT including Businesses Property, Agricultural Property, or assets transferred to a spouse. As the base cost uplift is intended to avoid a double tax charge to inheritance tax and CGT at the same time there is no obvious reason to provide an uplift and any such change would affect numerous estate plans seeking to rely on the uplift.
A more unlikely move is the less rumoured removal of Principle Residence Relief, which applies to disposal of an individual’s only or main residence in the UK. We expect any Government will be cautious around changes to this relief but it is possible Labour could introduce a rollover mechanism or total cap for the relief.
CGT has a residence-based test and so, with the exception of certain assets including UK property, it is possible to avoid paying CGT in the UK by becoming non-resident. This is not a new concept but the prospect of an increase to CGT rates, especially when coupled with already record high tax rates, could lead to more people exploring relocating.
The UK has clear rules on when someone is or is not resident for tax purposes so it is possible to plan your movements to become non-resident. However, this often requires spending only a limited amount of time in the UK so taxpayers will want to ensure this is realistic and be conscious of anti-avoidance rules which mean the move will be a long term commitment to be effective for tax purposes.
Some commentators had raised the prospect of an ‘Exit Tax’ to avoid such planning but it is not clear how this would be implemented and recent headlines have suggested Rachel Reeves is distancing herself from the idea.
Labour has confirmed that it will not reintroduce the Lifetime Allowance (LTA) however it could consider a flat relief on pension contributions (as opposed to linking this to tax rates). This has been discussed for many years so seems unlikely, but there are other options available (including reducing the Annual Allowance again and/or potentially introducing company NIC on employer contributions).
A more likely scenario is the reduction of the Lump Sum Allowance (LSA) and addressing the taxation of pensions on death. Following the abolition of the LTA, the LSA is no longer linked to any wider legislation and therefore the Government could easily reduce the amount of tax-free cash individuals can take from their pensions.
The taxation of pension death benefits has long felt anomalous – receiving tax relief on contributions; tax-free investment growth and then passing the funds on tax-free on death. Given the level of wealth stored up in pensions Labour may seek to tax pension funds on death moving forward.
Whilst there was a promise within the Labour election manifesto not to raise income tax on employment income or NIC, there is concern that the intention was that this applied to employee NIC rather than employer NIC.
Based on current speculations, raising taxes in this area could then take two or three forms where employer NIC is increased:
None of these would be popular moves and would put further strain on businesses across the UK.
Labour may also seek to raise the income tax rate applicable to dividend income and whilst this would primarily hit investors, business owners who take dividends as part of their remuneration would also suffer.
The number of estates paying IHT has increased significantly over the years due to inflation and frozen thresholds, so it is no surprise that the prospect of further changes is raising concerns. If Labour does seek to increase the tax yield from IHT we would expect this to be through limiting some of the generous reliefs – perhaps by removing Business Relief on tax-structured investments (see below), limiting Agricultural Property Relief to working farmers, or by changing the seven-year gifting rules to perhaps introduce a lifetime limit.
Whilst it is difficult to plan in the absence of any certainty, for those already considering estate planning, it might be worth making gifts or setting up trusts prior to the UK Budget announcement.
There have been specific rumours of a restriction to the availability of BR including the possibility of a £500,000 cap per person. This would be a drastic departure from the current system, where BR can provide up to 100% relief on qualifying business assets (typically shares in a trading company).
Capping BR could have a catastrophic impact on business owners, the most damaging being the possibility that business assets may need to be sold to fund the tax bill. The Government will need to consider how they balance the need for increased tax revenue with the importance of supporting business continuity.
An alternative to setting a cap may be to tighten criteria on what can be considered ‘qualifying’ for BR purposes, specifically excluding certain activities or the ability to hold certain assets within the business. This would result in the need for the business owners to consider separating trading activities and what would be considered ‘investment assets’ into different entities.
A Business Tax Roadmap has been promised within six months of Labour being elected into Government so whilst we do expect changes, these are unlikely to be implemented immediately, giving individuals, families and businesses should hopefully have time to plan.
The concept of a wealth tax has also been mentioned but this would be very complex to introduce and represent a very different approach from the UK’s current tax policy. A wealth tax is typically an annual charge on an individual’s assets which may or may not be limited to real estate or assets in a particular jurisdiction.
Whilst it cannot be entirely ruled out and there are examples of such a tax being levied in other developed countries, we consider the likelihood of a Wealth Tax being announced in the Budget to be low.
Labour has committed to the abolition of the non-domicile regime and so we expect they will push through significant changes including the introduction of the FIG regime. The related reform of the IHT regime is causing greater concern with non-doms being very concerned about exposing their global estate to UK IHT within a relatively short time frame.
Labour will be well aware that those most affected have the ability to relocate at will and so there have been reports that the proposals may be watered down to mitigate this flight risk, which might equate to IHT having a longer period of grace time for those arriving in the UK or shorter tail for those leaving.
In opposition, Labour had vowed to make the Apprenticeship Levy more flexible so it can be used on other types of training. On 24 September, The UK Government announced reforms to the apprenticeship system in England. In summary, the changes announced were:
At this stage, it is not known whether there will be an increase to the Apprenticeship Levy’s 0.5% charge for employers with a paybill of over £3m (please note, if in a group, all paybills are added together, you do not look at each entity in isolation). However, this will be something to watch as a way of raising extra revenue, where the new Growth and Skills Levy is a higher charge than the current Levy.
The Conservative Government previously introduced the mandating of payrolling benefits in kind from April 2026 onwards. However, we are still awaiting Labour’s plans on the future of P11D filing and payrolling in general, as well as feedback from recent consultations with HMRC. We predict that any change is likely to require further technology enhancements to mandate and is not a straightforward process. Employers should therefore be carefully consider whether payrolling is appropriate given the process they may already have in place with P11Ds for the 24/25 and 25/26 tax years.
Carried interest is a type of performance-related reward that fund managers often receive as part of their remuneration package, primarily in the Private Equity industry. This type of reward is typically taxed under CGT rules (subject to anti-avoidance) but Labour announced they will seek to charge these amounts to income tax, albeit it’s not clear whether this will be an outright change or partial change.
The Private Equity sector is an important sector for the UK economy and Labour will be keen to ensure the UK remains competitive – therefore they may take a considered approach where we might see some form of compromise to perhaps apportion receipts between income and capital.
If you require any support or tax advisory services ahead of the UK's Autumn Budget, please do not hesitate to get in touch with our Tax professionals.
Rachel Reeves, the first female Chancellor in UK history, presented her Autumn Budget in October. This was Labour’s first Budget in over fourteen years and both the Chancellor and PM had hinted that difficult decisions would have to be made.
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