As the general election is just around the corner, the battle lines are being drawn with taxes at the forefront of the debate. Both the Conservative and Labour parties are unveiling their tax strategies, aiming to sway voters before 4th July.
With the two set to battle it out until the very end, let’s break down how each party plans to tackle the taxes for individuals and businesses.
Overall Fiscal Approach
The Institute for Fiscal Studies (IFS) suggests that the next government faces tough choices: implementing spending cuts, raising taxes beyond current levels, or increasing borrowing, which would conflict with promises to stabilise debt as a share of national income. These options highlight the difficult fiscal realities the UK will face post-election.
Both parties claim that they will not be increasing taxes, but it’s hard to see how this can be reconciled with their spending plans. The probable explanation is that both parties are hoping for the economy to grow, and relying on the resulting revenue to finance spending.
It may also be that they are talking only about tax as it applies to normal people – PAYE, National Insurance, and VAT – and that more niche taxes, like Inheritance Tax, Capital Gains Tax, and indirect taxes, are still fair game.
Either way, specific areas within the main taxes may also be targeted, especially where they relate to unpopular taxpayers like banks, oil companies, and landlords.
Income Tax and National Insurance
Both the Conservatives and Labour have pledged not to increase income tax or National Insurance rates. However, by keeping income tax thresholds frozen until 2028, as both parties are proposing, they effectively increase the tax burden due to pay inflation, leading to higher taxes for many as salaries rise.
The Conservatives have gone further on National Insurance, and are proposing to get rid of it altogether. This appears to refer only to employee contributions, and to cutting them for the self-employed, so NI would still be an issue for employers. This would be a significant change to the overall shape of the tax system, and would cost large sums, so is likely to be done later in a Conservative Parliament rather than earlier.
Other parties are suggesting some tax rises, and the degree of support for those parties may influence the new Government’s view on how willing voters are to accept additional taxes later in the Parliament.
Non-Dom Tax
The government announced changes to non-UK domiciled individuals’ tax rules in the 2024 Spring Budget, set to take effect from April 2025. These changes mean that individuals who are tax residents in the UK for more than four years would pay UK tax on foreign income and gains. However, the reforms are uncertain due to the election.
Labour doesn’t oppose the plan – they had been calling for something similar, after all – but they aim to close perceived loopholes, including removing transitional rules that allow non-doms to pay UK tax on only 50% of their foreign income in the 2025/26 tax year and preventing non-doms from sheltering offshore assets from inheritance tax (IHT) by transferring them to excluded property trusts.
Inheritance Tax (IHT)
Both parties have given little indication of changes to IHT. Chancellor Jeremy Hunt has described IHT as “profoundly anti-Conservative,” suggesting potential reform under a Conservative government. Labour leader Sir Keir Starmer, however, opposes reducing or abolishing IHT. IHT doesn’t raise much tax revenue, and significant changes to IHT are unlikely, but on the other hand it is a high-profile tax so Labour may look to do something eye-catching – ‘abolishing unfair reliefs’, perhaps – even if the revenue raised is small.
Business Taxes
Labour plans to cap corporation tax at 25% and publish a roadmap for business taxation during the next parliament. The Conservatives aim to support businesses by keeping taxes low. However, details will be crucial, as changes to existing reliefs could impact the overall tax burden on businesses – particularly large businesses in unpopular sectors, with potential windfall taxes on banks and oil companies.
Pensions
The Conservatives promise a ‘Triple Lock Plus,’ increasing the tax-free pension allowance by the higher of 2.5%, average earnings, or inflation. Labour supports the state pension triple lock but won’t match the Conservatives’ additional pledge. The status of pensions as inheritance tax-efficient vehicles could change, depending on future reforms.
Capital Gains Tax (CGT)
Both parties have ruled out increasing CGT rates. However, as with IHT, this is a relatively high-profile tax despite the small amounts collected, so existing reliefs may be targeted to raise a little revenue and to satisfy voters.
A concern for many entrepreneurs is Business Asset Disposal Relief, which halves the tax payable on the first £1m of gains when selling a business. The relief was cut from £10m a few years ago, and it seems unlikely that it will be cut further, as that would look too much like an attack on small business. If any changes are made, they are unlikely to take effect before the post-election Budget, and would probably be no earlier than April 2025.
There has been a suggestion recently that CGT rates should be increased to match income tax. A recent Treasury review of the options for CGT gave some support to the proposal, but only if indexation was reintroduced to ensure that the tax only falls on gains in excess of inflation. This would reduce the impact of higher rates significantly for long-term investments, and in many cases actually reduce the tax charge, and so even if the new Government were to adopt it (perhaps saying ‘we’re not increasing CGT rates, we’re just redefining gains as income’) the impact on investors may not be significant.
VAT
Neither party plans to raise VAT. However, Labour intends to end tax breaks for private schools, making them subject to VAT and business rates.
VAT is a complex tax that is ripe for simplification, but that is a herculean task that no party is likely to want to take on soon. There may however be some tinkering with higher-profile items, either to reduce the tax (as the Conservatives did with sanitary products) or increase it (as above) in order to make political points.
Avoidance and administration
Tax avoidance is a priority for every party, with predicted recoveries of £5bn to £7bn from cracking down on it. Interestingly, HMRC’s figures for the Tax Gap suggest that this is the whole amount lost through avoidance and evasion, with most of it lost to error, mistakes, or inability to pay. Politicians seem to be either very confident in HMRC’s ability to make the system watertight, pessimistic about the accuracy of the Tax Gap calculations, or perhaps – and this is only a possibility – a little confused about what the numbers mean.
HMRC are more focused on the ‘error and mistake’ elements of the Tax Gap than politicians seem to be, and so the new Government will almost certainly be presented with proposals for new programmes to digitalise and automate the tax system.
Increased activity in these areas could have short-term costs and disruption for businesses and individuals, but if HMRC can get the resources to improve its systems and to make life easier and more certain for taxpayers, the medium to long term prospects could be greatly improved.
Concluding Statement
Both parties currently avoid commitment to direct tax rate increases, instead relying on fiscal drag and potential adjustments to reliefs to increase tax revenue. This approach allows them to maintain headline commitments while subtly increasing the overall tax burden. As policies may evolve, particularly with pending manifestos, staying informed will help you navigate and prepare for potential changes in the tax landscape.
Please don’t hesitate to get in touch with your dedicated Adviser if you have any queries about the information above or regarding the General Election.