The five taxes Labour could target in the October Budget
With Labour now in government, the public is waiting to see how it follows through on its manifesto promises.
Labour has promised to shorten NHS waiting times, crack down on anti-social behaviour and hire 6,500 more teachers. When it comes to money, however, the situation is far less clear.
Sir Keir Starmer has warned his party’s first Budget “is going to be painful”. He said he would have no choice but to ask people to “accept short term pain for long term good”.
This comes after Chancellor Rachel Reeves announced she would be scrapping a series of plans initiated by the previous government, claiming she had discovered £22bn of unfunded spending.
Here, Telegraph Money takes you through what Labour could have in store.
When is the first Labour Budget?
Chancellor Rachel Reeves will present the Government’s first Budget to Parliament on October 30. Labour has committed to including a forecast from the Office for Budget Responsibility, which requires 10 weeks’ notice.
There is currently no obstacle to a chancellor announcing a Budget without an OBR forecast, as Liz Truss did in September 2022. However, Labour has said it will legislate to ensure that the OBR has the power to publish judgements on taxation or spending changes.
Changes announced in the Budget require legislation, so they are included in a new Finance Bill which is put to Parliament. This puts in place the proposals for taxation made by the chancellor in the Budget statement, bringing them into law. Technically, a government can be defeated on its Budget in the House of Commons, but this is very rare.
The last chancellor to face defeat was Kenneth Clarke in 1994, when he tried to raise VAT. Some Conservative MPs voted against the measure, seeing it as a clear breach of the 1992 election manifesto.
The State Opening of Parliament and the King’s Speech was held on Wednesday July 17. The speech set out the programme of legislation that the newly-elected Government intends to pursue over the parliamentary session.
What has Labour announced?
As part of its “first steps”, Labour has promised to “deliver economic stability, with tough spending rules” to grow the economy and keep taxes, inflation and mortgages as low as possible.
This ties in with its first of five “missions” – kick-starting economic growth. It has also committed to ensuring the current budget moves into balance, enabling day-to-day costs to be met by revenues.
The five taxes Labour could target
1. Capital gains tax
Unlike the Tories, Labour did not commit to freezing capital gains. Sir Keir Starmer has personally ruled out charging capital gains on someone’s first home, which is exempt under the current system, but stopped short of extending that to any rise.
An increase in the rate, or cut in the current £3,000 threshold at which it becomes due, would hit second homeowners and landlords, business owners, shareholders and those selling valuable assets.
Sarah Coles, of Hargreaves Lansdown, said: “Labour hasn’t ruled out raising capital gains tax. It would enable the government to deliver on the promise not to raise taxes for ‘working people’, because it’s a tax on wealth. However, it’s a tough balancing act, because it doesn’t sit well with its plans to be a government that helps people create wealth. If they were to make changes, they’d have a wide range of options.
Chris Rudden, head of UK investment consultants at Moneyfarm, added: “Labour pledged that it wouldn’t go after income tax or National Insurance and I don’t think they would renege on that straight away. However, I have a sneaking suspicion that capital gains tax is not safe.
“However, the Treasury still hasn’t seen the full effect of the windfall that was created by Jeremy Hunt cutting the CGT allowance to £3,000. They might find that the increase in capital gains receipts will be plenty and so they don’t have to go after it further.
“In a world where it’s widely considered that the UK population doesn’t invest enough to support their future, putting a higher tax burden on investments puts a greater obstacle to getting people started.”
2. Inheritance tax
A leaked recording of a shadow frontbencher has raised fears that Labour could be planning a raid on family wealth after death. Darren Jones, the shadow chief secretary to the Treasury, told a public meeting in March that inheritance tax (IHT) could be used to “redistribute wealth” and address “intergenerational inequality”.
This has prompted concern that Labour could attack various reliefs that allow families to pay less inheritance tax.
Homeowners can pass on £500,000 – or £1m if they are a couple – as long as they leave their house to their children. Labour could choose to cut or lower this exemption, widening the scope of inheritance tax.
Alternatively Labour could attack various reliefs that allow people to give away their wealth earlier, without paying death duties.
Britain already has one of the highest inheritance tax rates in the OECD at 40pc.
If your estate is worth more £325,000 when you die, then your beneficiaries will pay this charge on everything above the threshold, called the nil-rate band. The tax-free exemption has been frozen at £325,000 since 2009, dragging thousands into the death duty net as house prices have soared.
According to official forecasts, the number of families paying the charge will hit nearly 44,000 a year by 2028-29, up from 33,000 this year. In total, almost 200,000 estates will pay the tax over the next five years.
3. Tax on pensions
Charging inheritance tax on pensions is another option. Currently, pensions are not considered part of your estate when you die, meaning IHT is not due.
However, some fear that Labour might change this, which analysis shows could cost grieving families tens of thousands of pounds. It could also lower the maximum amount people can contribute to their pensions without losing tax relief, the so-called annual allowance.
Alice Haine, of fund shop BestInvest, said: “Although Labour appear to have ditched a previous pledge to reinstate the pensions lifetime allowance, it is possible it may explore other avenues for changing the taxation of pensions such as lowering the £60,000 annual allowance on pension contributions, reducing the generous tax relief on contributions, scrapping the 25pc tax-free lump sum accessible at the age of 55 and removing the inheritance tax exemption on pensions.”
Andrew Tully, of Nucleus Financial, added: “Labour appears to have ruled out any reintroduction of the lifetime allowance, at least in the short-term, but they could consider changing the current very attractive rules on passing on pension wealth tax-efficiently to families. One way to do this would be to include pension wealth within the estate for IHT purposes.”
When it comes to the state pension, Labour has committed to maintaining the triple lock, ensuring the state pension will continue to increase by the highest of inflation, wages or 2.5pc. However, under current plans this would see it become taxable by 2028 as it will exceed the personal allowance, leaving some pensioners with a three-figure tax bill by the end of the current Parliament.
Labour has not revealed any plans to protect the state pension from tax. Currently, more than a million households rely solely on the state pension and benefits as their only income.
4. Savings tax
Cuts to the Isa allowance and also the personal savings allowance are among the options open to Labour.
The Resolution Foundation, a think tank, has previously urged the Government to cap the amount that can be saved into an Isa at £100,000.
Savers can pay in £20,000 per year, but there is currently no limit on how much they can stash away over their lifetime. The Resolution Foundation argued this mainly benefits those with high levels of disposable income.
Returns on cash Isas do not trigger a tax bill, but tax can be owed on interest earned from ordinary savings accounts if it exceeded the personal savings allowance.
The allowance is £1,000 for basic-rate taxpayers and £500 for those in the higher-rate band. Additional-rate taxpayers get no allowance.
Yet frozen tax thresholds have dragged millions into higher tax brackets, slashing their personal saving allowance dramatically.
As savings rates have soared as high as 5pc, a higher-rate taxpayer now needs just £10,000 in savings to exceed their personal savings allowance.
As a result, people are expected to pay a record-breaking £10.3bn in tax on their savings in 2024-25, according to HM Revenue and Customs – up about £1bn since last year.
5. Council tax
Sir Keir Starmer has refused to rule out a potential council tax reform, leaving all options on the table for a future shake-up.
In a leaked recording, Darren Jones, shadow chief secretary to the Treasury, also told a constituency meeting that the bands were “out-of-date”, hinting at a tax raid on wealthy people’s homes.
The Fairer Share think tank has proposed replacing the current system with a “proportional” council tax.
Instead of bands, the bill would be a flat percentage, such as 0.5pc, of a property’s value and it would be uprated annually, to reflect changing values.
However, under this system, council tax bills would rise by an average of £1,230 for more than four million households in England, according to the Institute for Fiscal Studies (IFS) think tank.
Reevaluating bands could also be on the cards. In England, council tax bands are based on 1991 property values, despite house prices rising eightfold in some areas.
In Wales, Labour has already pledged to reevaluate council tax with higher bands and higher rates to address “property wealth” and “rebalance” the current system.
Re-evaluating the bands to current house prices would spark bills to rise in 119 of the 325 local authority areas in England, the IFS said.
The average household would see their tax bill rise by £82, but those in 32 local authorities would suffer increases of more than £100.
What has Labour cut to make savings?
In what was seen as bombshell announcement, Labour has said it will limit winter fuel payments to those on certain benefits. It means that around 90pc of British pensioners will now not qualify for this payment.
Only households with someone aged over state pension age, currently 66 years old, receiving pension credit, Universal Credit, Income Support, income-based Jobseeker’s Allowance and income-related Employment and Support Allowance will continue to receive Winter Fuel Payments. The Chancellor said this will save £1.5bn annually.
In addition, Ms Reeves said she will not go ahead with the Conservatives’ plan for adult social care charging reforms. The proposed changes had been planned to cap individual personal care costs at £86,000.
It was also set to allow those with less than £100,000 in assets and savings to access state support for eligible social care costs. Currently only those with less than £23,250 are eligible. Ms Reeves said ending these reforms will save the Government £4bn by 2029-30.
Further, Ms Reeves has scrapped Tory plans for an Advanced British Standard qualification that was set to bring together A-levels and T-levels into a single qualification framework. Cancelling this reform will save £185m next year.
What has Labour promised to deliver?
Labour has said it will accept the independent Pay Review Body recommendations and increase public sector salaries by an average of 5.5pc. This will cost around £9bn a year.
Labour will seek to enhance job security by banning zero hours contracts and ending the practice of “fire and rehire”, while workers will get parental leave and statutory sick pay from day one of a new job.
Low earners will get a boost with minimum pay that is a “genuine living wage”, regardless of age.
Families will benefit from expanded childcare and free breakfast clubs in every primary school. Communities will regain control of their bus routes and first-time buyers will get more support to get onto the housing ladder, Labour says.
The Government wants to also tighten energy market regulation, which its manifesto says will reduce bills and hold providers to account for wrongdoing.
Labour will also take aim at non-doms by abolishing the status “once and for all”. The Tories scrapped non-doms’ special status in the Budget, but Labour will go one step further and close a “loophole” that allows non-doms to move their money into an offshore trust before the ban comes into place in April 2025.
With a convincing mandate and comfortable majority, it should be easy to deliver on these quickly. The Salisbury Convention will also nullify any potential opposition in the House of Lords, as peers do not vote down Bills mentioned in a manifesto.
What is Labour committed to that is less clear?
Some of Labour’s commitments are low on detail, leaving the door open to speculation. As the new government launches into its first 100 days, more detail should be forthcoming and this article will be updated accordingly.
A pensions review
Labour has previously committed to a pensions review. Its manifesto said this would aim to “improve security in retirement” and deliver better returns for savers.
With detail scarce on what this could mean in reality, however, speculation ran riot during the election campaign.
Ms Reeves previously suggested that tax relief on pension contributions should be set at a flat rate for everyone, rather than relief granted at your highest rate of income tax as it is currently.
The party has said this is not policy and it is understood to no longer be Ms Reeves’ view, but Labour has not ruled out any attacks on tax relief in its manifesto. Figures suggest the move could cost some pension savers more than £100,000.
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Experts also say Labour might now move on the 25pc tax-free lump sum that pension savers can currently draw, which Liz Kendall recently failed to deny.
Helen Morrissey, of Hargreaves Lansdown, said: “Labour’s promised review of the pension landscape is sorely needed to ensure people continue to get good outcomes from retirement.
“The Government is running out of road when it comes to deploying strategies like hiking the state pension age. People need certainty in terms of what they are going to get from the state pension and when, so the state pension needs to be sustainable in the long term.
“The review also needs to look carefully at the pension tax system. We’ve seen many changes to the various allowances and there are rumours Labour may look to tinker with tax relief. The review needs to take an overarching view of the system to make sure it is working as it should in terms of incentivising people to save without being too complex.”
Labour’s review will also look at how to increase investment in the UK market by pension funds, which had a mixed reaction from experts.
Mr Tully said: “A new Labour government is likely to want to encourage more investment within the UK from pensions, and potentially wider savings such as Isas. That sounds sensible given the significant funds held within UK pensions which could be helping grow the UK economy.
“But if any new rules require a portion of people’s pensions to be invested in certain, possibly high risk, assets, that may not be the best outcome for an individual.”
Now in government, Labour is highly likely to move forward with the review – but it’s unclear where that may lead and how it might affect savers.
VAT on schools
Labour has been very clear that it will remove the VAT and business rates exemption from private schools. It means 20pc in tax will become due on tuition and boarding fees.
It has said the change will come into effect from January 1 2025 and will apply to any fees paid in advance as of July 29, the day Ms Reeves announced the policy.
It is expected that most schools will pass the costs on to fee-payers, meaning some children could be withdrawn from school as families struggle with rising costs. An exodus of private school students could overwhelm local state schools.
Can Labour afford all of its plans?
Experts have already warned that Labour might struggle to keep to its spending rules and deliver on its promises in the current economic climate.
The Conservatives say that Labour’s plan has a £2bn black hole that early tax increases will need to fill, while think tanks the Institute for Fiscal Studies and the Resolution Foundation have both suggested tax rises could be needed to balance the books.
Ms Coles said: “Labour made some expensive commitments during the campaign, including sticking with the pensions triple lock and ruling out rises in income tax, National Insurance or VAT.
“However, money will be tight. All the maths in the manifesto factored in planned cuts by the former government, so it will be pinning its hopes on squeezing more growth from the economy to help make the maths stack up. If it doesn’t get the growth, it’s going to need to make some tough choices between spending cuts or additional taxes.”
There are potential revenue-raising opportunities that could be announced during a Budget should a cash injection be needed – and Labour has failed to rule many of these out.
