What can we expect from the New Government on UK Tax Changes?

What can we expect from the New Government on UK Tax Changes?

As we navigate the complexities of the new government’s tax policies, it’s crucial to stay informed and prepared. This article by Nici Goldsmith provides an overview of some of the key tax changes we expect.

Labour Party Tax Policies on NI & Tax

After the recent change in government, The Labour Party has assured us that there will be no hikes in income tax rates, but they have not proposed any increases in tax bands either. This means that due to wage inflation, many individuals will find themselves in a higher tax bracket. The government plans to maintain the current tax band thresholds until 2028, which will result in an overall increase in the UK’s tax revenue without raising taxes – a phenomenon known as ‘fiscal creep’.  It’s a bit like shrinkflation in that you don’t really notice it, but you have less than you did last year – in this case money in your pocket rather than chocolate in the packet. To understand how these changes might affect you, consider scheduling a consultation with our one of our tax experts.

National Insurance Contributions

Regarding National Insurance Contributions, the Labour party has declared that they will not raise NIC for individuals.  However, the proposed reduction by the last Conservative government in the 2024 Budget did not pass into the Finance Act, so it is unclear if the new government will honour this pledge, or not.

Capital Gains Tax 

In terms of Capital Gains Tax Reform, Labour intends to address the current loophole that allows private equity carried interest to be taxed at 20% because it is considered a capital gain, not income. The future applicable rate is yet to be confirmed. However, it has been suggested that if a fund manager invests their own capital, capital treatment may be permitted, similar to other countries. A consultation process regarding when carried interest will be taxed as income may be expected ahead of this.

Labour have ruled out introducing CGT on the sale of a primary residence. However, they are reportedly considering options to increase tax revenue in the future, one of which could be raising the rate of CGT. Consultation is expected before any changes are made.  However, whilst Rachel Reeves recently confirmed that there will be no increases to income tax, she did not commit to the same for capital gains tax (CGT).  The top rate of CGT on residential real estate was reduced from 28% to 24% in the last Finance Act, and this has passed into law.  Will she reinstate this, or even increase the CGT rates (otherwise seen to be at a historic low) in general?

Nom Dom Status UK : What’s Changing?

On the subject of non-dom status, while the Conservative government had already proposed abolishing the UK’s tax regime for non-UK domiciled individuals, the Labour manifesto simply confirms plans to abolish the ‘non-dom loophole’. However, there are no specific proposals for a replacement regime for short-term UK residents, although there are indications that they see the proposed four-year period as adequate (those arriving in the UK who have not been resident within the last 10 years will not be taxed on their foreign income or gains during the first four years of residence).

In April 2024, Labour stated that they support many aspects of the original proposals, but they would make some changes should they form the next government. The most significant of these would be to ensure that all foreign assets within trusts would be liable to UK Inheritance Tax. Additionally, they would not opt to introduce a tax discount on remittances for those who do not qualify for the new rules. You can read more here

SDLT

In terms of Stamp Duty Land Tax, Labour intends to increase the SDLT surcharge applied when overseas nationals buy UK residential property by 1% (taking this surcharge to 3%).

Inheritance Tax Changes

In relation to Inheritance Tax, aside from the proposals on offshore trusts, there was no other reference to IHT in the Labour manifesto. However, it has been reported that Labour is considering options to increase tax revenue that include significant changes to IHT. This could involve scrapping or altering the rules for Business Relief and Agricultural Relief to increase tax revenue without changing the headline rates of IHT.

Changes are also potentially being considered for lifetime gifts, where currently no IHT is due if a person lives for more than seven years after making a gift.

Pensions

Labour had previously stated that they would re-introduce the lifetime allowance charge for pensions. That plan was dropped during the election campaign, however, this could make other changes to Pensions Tax Relief more likely in the future.

Currently, individuals receive tax relief (up to 45%) on making pension contributions and can pass on their pension free of IHT on death. It has been rumoured that this IHT relief is being considered as part of a wider review of capital taxes.

In addition, the new Chancellor Rachel Reeves has previously campaigned to reduce tax relief for pension contributions for high earners, suggesting that introducing a flat rate of relief at 33% would benefit basic-rate taxpayers and reduce the savings subsidy for higher earners.

Under the current rules, individuals can contribute up to £60,000 a year to their pension and can also use up any unused element of this annual allowance for the prior three tax years. For higher earners, it may be worth considering topping up pension contributions ahead of any possible changes.

Please see our Tax year end planning guide for more details.

HMRC Enforcement

In line with recent government announcements, a commitment has been made to bolster the HMRC workforce by an additional 5,000 employees. This initiative is aimed at addressing the UK’s “tax gap”, which was projected to be around £39.8 billion for the fiscal year 2022/23. The increase in staff is anticipated to enhance compliance enforcement activities over time.

It is worth noting that small businesses, which are believed to contribute to up to 60% of the uncollected tax, might be the primary focus of this intensified enforcement.  Now might be the perfect time to consider a Tax Fee Protection service just one of the many benefits available to our clients.

In summary, we don’t know exactly what the detail will bring, so it’s prudent to prepare in advance and take advantage of the existing tax reliefs. For instance, it would be beneficial to reassess your plans for inheritance and wealth protection at this time.  See our recent business owners guide

Should any of the tax proposals summarised above cause you concern and if you wish to have a conversation about how to navigate these concerns, please contact us, we’re ready to talk tax with you.

Get in touch today.