The UK’s General Election – what tax changes could be in store?

With a UK General Election set for 12 December, James Hender, Head of Private Wealth, and Lucy Brennan, partner in the Private Wealth Team at Saffery Champness, offer their analysis of what we know so far about the Conservative and Labour parties’ personal tax plans and what the proposed changes might mean in practice.

Conservative Party’s tax plans

Brexit aside, much of the Conservative leadership race earlier this year revolved around bold tax pledges. In the run-up to the election, we will no doubt see whether the debates and pledges around tax will resurface, or indeed change as a result of public reaction.

• Boris Johnson’s flagship tax policy during his leadership campaign was to increase the higher income tax rate threshold to £80,000.
• The Prime Minister has suggested increasing the Stamp Duty Land Tax threshold to £500,000 and overhauling the upper rates.
• There was a discussion at the Conservative Party Conference in which the Chancellor, Sajid Javid, said that he was considering scrapping inheritance tax.Extensive public spending promises have been made that require funding – either through borrowing or taxation – totalling £13.8 billion, as of the September Spending Review, rising to over £50 billion as of the Conservative Party Conference.

Labour Party’s tax plans

The Labour party, under Jeremy Corbyn’s leadership, has similarly proposed a number of personal tax reforms. Much of the current Labour party’s thinking was introduced via its 2017 election manifesto, and off the back of the last Budget. The Shadow Chancellor John McDonnell has also been vocal about tax changes, most significantly around capital gains tax and non-domiciled status.

• Labour’s amendment to Chancellor Philip Hammond’s 2018 Budget backed reducing the threshold for the additional income tax rate (45%) from £150,000 to £80,000.
• Along with a new rate of income tax at 50% for income over £125,000.
• Labour’s 2017 Manifesto set out an ‘Excessive pay levy’, a 2.5% tax payable by employers on wages above £330,000 and a 5% tax on any wages above £500,000.
• The manifesto pledged to end the marriage allowance, which reduces a couple’s tax liability by £250 in the tax year.
• A land value tax to replace Council Tax.
• John McDonnell has promised to reverse the Conservative cuts to capital gains tax from 28% to 20% for higher rate taxpayers and 18% to 10% for those on the basic rate.
• He has also made a public commitment to reduce the minimum inheritance tax threshold from £325,000 to £125,000. More recently, Mr McDonnell has pledged to abolish the non-domiciled tax regime in his first Budget if Labour is elected.
• Extensive public spending promises requiring funding.

On the Conservative Party’s tax plans…

James Hender comments:

“Boris Johnson has made a host of sizeable spending promises in the first months of his premiership, culminating in the Chancellor’s Spending Round, which he said was turning the page on austerity, and the Conservative Party Conference, which saw a further re-orientation of the party line away from cuts towards spending.

“This includes £13.8 billion more to be spent on public services in 2020-21, a commitment to providing £13 billion to build 40 new hospitals, alongside a funding increase for the NHS of £33.9 billion per year by 2023-24, and a promise to hire 20,000 police officers by 2022 at a cost of £1.1 billion.”

Lucy Brennan added:

“If Sajid Javid delivers on Boris Johnson’s promises to change the higher rate tax band, the implications of this would be significant to say the least, and could see hundreds of thousands of taxpayers pulled out of the higher tax bracket entirely. While clearly a play to the traditional Conservative heartlands, over the last two decades more earners have been sucked into the higher tax bands thanks to fiscal drag. As a result, these people shoulder a significant economic burden, whilst also missing out on the recent changes to the Personal Allowance that have mainly benefited lower and middle-income households.

“What many people forget is that an oddity of the income tax system means that while the headline additional tax rate is 45%, there is a sizeable group of earners which is essentially paying 60% tax on part of their income because of the loss of the Personal Allowance. This is the result of the threshold for the 60% tax band remaining at £100,000 while the personal allowance has increased. Therefore the 60% tax band has elongated. The effects of fiscal drag mean that more people (who don’t necessarily feel rich) are having more income taxed at 60%.

“The Chancellor’s inheritance tax comments at the Conservative Party conference imply the most drastic change of all. Scrapping a tax which 28,100 estates paid in 2016-17 would have an enormous impact to peoples’ lives and the economy more broadly. There would certainly be an initial impact in the Treasury’s tax revenue, the Chancellor will be hoping that the recipients of untaxed inheritance will spend, save and invest, all of which would ultimately feed back to the Exchequer. This policy could also encourage more people from overseas to seek UK domicile, which again could translate into additional income for HMRC.

“As far as the Prime Minister’s Stamp Duty Land Tax plans, the proposed threshold reform would translate to significant tax savings – £5,000 on a property worth £300,000 and £15,000 on a property worth £500,000. Nothing specific has been released on the proposed overhaul of upper rates, but the implication is further savings on properties over £925,000, which could tally into the tens of thousands.”

On the Labour Party’s tax plans…

James Hender comments:

“Given their extensive spending plans, Labour has announced a host of tax rises in order to fund these expenses. Some of these proposals appeared in the Shadow Chancellor’s amendment to the budget in November of last year, such as the proposal to reduce the threshold for the additional rate of 45p in the pound from £150,000 to £80,000, then introduce a new income tax rate at 50p in the pound for income over £125,000 a year.

“High earners will be affected by this proposal, paying 50p instead of 40p in the pound currently levied on income between £125,000 and £150,000, and paying an extra 5p in the pound on all earnings over £150,000. This will translate to almost £5,000 more paid in income tax per year by an individual earning £150,000.

“Additionally, for the employers of the highest earners, the Labour Party has proposed a so-called ‘excessive pay levy’. This would be paid at 2.5% and 5% by companies on wages over £330,000 and £500,000 respectively. For those earning £750,000, this would amount to an additional employer cost of £4,250 in tax on wages between £330,000 and £500,000, and an additional employer cost of £12,500 on the top £250,000. Although this tax will not affect people’s incomes directly,it could reduce the overall competitiveness of the UK as a place to do business..

“Labour also responded approvingly to the IPPR’s report into income from wealth, which proposed that it should be taxed equally to income from work. Mr McDonnell reaffirmed Labour’s commitment to reverse cuts made by the Conservative Party to capital gains tax, which reduced the higher rate from 28% to 20% and from 18% to 10% for those on the basic rate. This would mean, under Labour’s proposals, a higher rate payer who disposes of an asset and receives £20,000 in gains would pay £5,600 in tax rather than £4,000. Individuals can also currently take advantage of the £12,000 personal allowance for capital gains, which the IPPR report argued should be scrapped.

“According to the Shadow Chancellor, Labour also intends to reduce the threshold for inheritance tax from £335,000 to £125,000 per person and has also spoken of replacing the current inheritance tax system altogether. If Labour is elected, this proposal may substantially increase both the number of estates liable and the size of the liabilities for those already above the threshold.”