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Labour’s election win – Understanding its impact on your finances
As the sun rose on Friday morning, Labour began its celebration of a significant victory, claiming a majority that fell short of its last landslide success in 1997.
With a manifesto focused on change, its proposals for the next five years of Parliament are far-reaching, but not revolutionary.
Now in power, it is important to review their plan in more detail to understand the impact their ideas, if delivered, could have on you and your business in the years to come.
Our experienced team have been busy dissecting and analysing Labour’s proposals, to explore their intentions and potential outcomes, so that you can plan effectively for the future.
While the manifesto is Labour’s plan for the country, it is important to remember that, even with a significant majority, it may not be possible to deliver on each promise and each proposal may be subject to change in the future.
The economy
Labour has undoubtedly inherited a struggling economy, with poor public finances, which it makes very clear in its manifesto.
The new Government has promised to “turn the page on this economic chaos” by implementing two key fiscal rules:
- The current budget moves into balance so that day-to-day costs are met by revenues
- Debt must be falling as a share of the economy by the fifth year of the parliament
Both objectives will be hard to meet, especially as Labour has said it does not intend to “return to austerity.”
Instead, its economic plan is focused on prioritising investment for the future balanced with the need to rebuild public finances.
Personal finances
With the cost-of-living crisis affecting the finances of many people across the UK and driving poor economic growth due to individuals cutting back, Labour has said it will act, by:
- Bringing down the cost of energy, in part through the launch of its own publicly owned green energy investment company – Great British Energy – which will receive an £8.3 billion investment
- Reduce food prices by removing barriers and costs to businesses
- Expand access to childcare to help people be more productive, including the introduction of free breakfast clubs in every primary school
- Increase the availability of more affordable housing
Labour also wants to help people with their mortgages, by bringing down inflation, but plans in this area are less clear at the moment, apart from their continued support of an independent Bank of England.
Personal tax allowances
Labour has pledged to keep “taxes on working people” as “low as possible,” as such it will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.
However, they have also confirmed that they will not change the current freeze of tax rates, which is due to remain in place until 2028.
This effectively means, with the impact of inflation, that many people will be taxed more as their wages and income increase.
That means that taxpayers will still need to address this issue with careful tax planning to make sure they make the most of the allowances and reliefs available to them.
Non-domicile status
Before the election, in the Spring Budget, the former Chancellor Jeremy Hunt announced the abolition of non-dom status in the UK and the eventual removal of the remittance basis, under a transitional process.
At the time, Labour was up in arms about the policy as it mirrored its pledges at the time.
However, in response, the new Government is to double down on its plans announcing a “modern scheme” intended only to support people “genuinely in the country for a short period.”
The transitional arrangements due to be in place from April 2025, will not be retained under Labour’s plans and they have confirmed that they intend to end the use of offshore trusts to avoid Inheritance Tax.
This will, they say, ensure “that everyone who makes their home here in the UK pays their taxes here.”
Non-doms who are concerned about the changes that Labour might introduce and how they might affect them, should watch this space carefully and seek professional advice at the earliest opportunity.
Tax compliance
Labour has been quite critical about HM Revenue & Customs’ (HMRC’s) performance in relation to tax avoidance.
They have pledged to invest in the tax authority to help it modernise. As part of this, it will increase report and registration rules, make a significant investment in technology and enhance HMRC’s powers.
Labour hasn’t been shy in outlining where these efforts will be focused, saying that it wants HMRC to have a “renewed focus on tax avoidance by large businesses and the wealthy.”
This is part of the promise to eliminate unfairness in the UK’s tax system, by closing gaps and making sure that “everyone pays their fair share.”
Given the party’s discussion around the tax system and rules, it is likely that we will see further legislation introduced and a tougher approach by HMRC, which may mean a rise in the number of investigations it launches.
This stands to highlight the importance of tax compliance in the years to come and the value of robust and reliable accountancy services.
Business taxation
Labour has said that it wants to provide certainty to businesses following 14 years where the Corporation Tax rules have changed 26 times.
As such, the party has pledged to cap the current top rate of tax at 25 per cent for the entire life of the Parliament – although they will act if the rate makes the UK less competitive internationally.
The Full Expensing scheme and Annual Investment Allowance introduced by the last Government will be permanently retained but could be subject to further change.
For those uncertain of their eligibility for these reliefs, the Government will provide “greater clarity on what qualifies for allowances to improve business investment decisions.”
Finally, in England, Labour will replace the current business rates system to “level the playing field between the high street and online giants.”
Further details on this policy are vague, but Labour says it hopes to support entrepreneurs, revitalise high streets and improve the environment for investment.
Some of the areas of business taxation outlined by Labour remain unclear, but we are likely to learn more about their plans in the weeks and months to come.
Small business support
Labour’s specific plans for small businesses and sole traders aren’t significant, although its tax and economic policies, will support SMEs.
However, they have promised to assist with:
- Late payments: Labour plans to implement measures to ensure that small businesses and the self-employed receive timely payments. This initiative could significantly improve cash flow and reduce financial pressures related to delayed payments if delivered well.
- Exporting: The party has committed to enhancing guidance and simplifying the process for small businesses looking to export. This could open new markets for products and services and is a great opportunity to expand business reach internationally.
- British Business Bank reform: Labour proposes to reform the British Business Bank to provide more robust support for growth across all regions. This reform aims to make it easier for SMEs to access the capital needed for expansion and innovation.
Investment
Labour plans to establish a £7.3 billion National Wealth Fund, which will look to encourage private investment by pledging public money to a number of important projects, including:
- £1.8 billion to upgrade ports and build supply chains across the UK
- £1.5 billion to new gigafactories so our automotive industry leads the world
- £2.5 billion to rebuild our steel industry
- £1 billion to accelerate the deployment of carbon capture
- £500 million to support the manufacturing of green hydrogen.
A new 10-year infrastructure strategy will also be implemented to end short-termism and a new public body, the National Infrastructure and Service Transformation Authority, will be introduced to bring together the expertise from a wide range of existing agencies.
To support businesses and investment, Labour also plans to reform the current planning laws to make it easier for projects to get underway.
Businesses may benefit from these investments in several ways, including improved productivity and connectivity as a by-product, or directly through the supply chains that will be required to deliver this ambitious plan.
Fiscal events
As part of its bid to improve financial certainty, Labour has said it aims to only hold one fiscal event each year, where possible.
For some time, the Government has relied on both a Budget and Statement to outline its plans for the economy, but this may no longer be the case under the new Government.
This should provide some stability to the ever-changing tax rules if Labour’s plans are achieved.
Labour will also reform the Office for Budget Responsibility (OBR) so that every change to taxation or spending will be subject to an independent OBR forecast.
This change should help businesses and individuals to plan more effectively each year and remain compliant with changes as they are introduced at a slower pace.
Employment law and pay
Within the next 100 days, Labour plans to launch its “Plan to Make Work Pay: Delivering a New Deal for Working People”.
This will:
- Implement a real living wage that is adequate for living costs, altering the Low Pay Commission’s remit to include the cost of living alongside median wages and economic conditions
- Remove age-based wage differences under the National Minimum Wage scheme to benefit all adult workers
- Empower the Single Enforcement Body and HMRC with the necessary tools to enforce wage compliance, including penalties for non-compliance
- Promote flexible working arrangements as the default from day one.
- Abolish zero-hour contracts
- Guarantee contracts reflect actual hours worked based on a 12-week reference period, ensuring fair employment practices
- End fire and rehire practices.
Change is also on the slate for workplace pensions, with Labour adopting reforms that ensure that schemes utilise consolidation and scale, to deliver better returns.
Where will tax rise?
Despite their ambitious plans, Labour has tried to avoid discussions around tax rises, but taxes will have to rise in certain areas to meet the funding requirements of the manifesto.
Here are the key areas in which tax is slated to increase:
- VAT and business rates to apply to private school fees
- Carried interest tax loophole to be closed for private equity-related performance pay
- An increase in Stamp Duty of 1 per cent for non-UK residents purchasing residential properties
- A further windfall tax on oil and gas giants.
Of course, its decision to increase HMRC’s powers to crack down on tax avoidance, if successful, will also reduce the current tax gap.
What’s next
Like many of us, you are still trying to digest the events of the election and the implications of the new Labour Government.
We aren’t likely to see many of these initial proposals fleshed out in more detail for the next few weeks.
Parliament will soon enter its summer break and Sir Keir Starmer is currently assembling his cabinet.
It is early days, but we are more than likely to see a Budget of some form in the autumn so that the Government can enact its reforms.
We will continue to bring you updates in the months ahead as and when new policies and proposals are announced.
However, in the meantime, if you have any questions, please feel free to contact us.
