Last week's UK General Election has ushered in a seismic shift in the political landscape, with the new PM Sir Keir Starmer's Labour Party having secured a decisive majority victory. As the dust settles, many of us will be asking, will they fix the cost of living crisis?, or will my take-home pay be hit due to higher taxes?. Let's take a look into the tax implications of Labour's 2024 election win, and see what it means, at least for now, for your wallet and the broader economic outlook.
The Labour Party's manifesto, released prior to their landslide victory, outlined several key tax policies. Here's what you need to know:
1. Income Tax Thresholds
Labour has confirmed that they will maintain the current freeze on income tax thresholds until 2028. This decision, initially set by the previous Conservative government, means that as wages rise with inflation, more people will be pushed into higher tax brackets. This could result in a de facto tax increase for many workers. However, recent financial forecasts indicate this may be up for discussion.
If we were to speculate, Labour could create a more progressive tax system and raise rates for higher earners. A move like this could look like:
- Maintain the current basic rate of 20% for incomes up to £50,270.
- Increase the higher rate from 40% to 45% for incomes between £50,271 and £125,140.
- Raise the additional rate from 45% to 50% for incomes over £125,140.
A hypothetical change like this could significantly impact higher earners, while those on lower incomes may see little change to their tax burden.
2. Non-Dom Tax Reforms
One of Labour's flagship tax policies is the reform of the non-domiciled (non-dom) tax status. The party plans to close these tax loopholes, which they estimate will raise near £3 billion annually by 2025. This move is aimed at ensuring that wealthy individuals who reside in the UK pay their fair share of taxes.
3. VAT on Private School Fees
In a move that has garnered significant attention, Labour has pledged to charge VAT on private school fees. This policy is expected to generate additional revenue for the government, although the exact impact on individual families will vary.
4. Windfall Tax on Oil and Gas Companies
Labour has proposed an extension and increase of the windfall tax on oil and gas companies. While this doesn't directly affect individual pay, it could have broader implications for the economy and energy prices.
5. New Taxes on High-Value Properties and Wealth
Labour could look at making changes to target wealthy individuals in multiple ways. A potential mansion tax on properties valued over a certain threshold. A possible wealth tax on high-net-worth individuals. While these could be pie in the sky, a more likely reform to capital gains tax to align more closely with income tax rates is possible. Stamp duty raises are already confirmed for overseas investors.
These measures would push increases in tax revenue from those with the highest incomes and wealth, potentially offsetting any reductions in tax for lower earners.
7. Corporation Tax Reform: Indirect Effects on Pay
While corporation tax changes don't directly affect individual pay, they can have indirect effects on employment, wages, and the overall economy. Labour's current stance on corporation tax is to maintain the current corporation tax rate at 25%, according to recent policy updates. This doesn't mean the small business rate of 19 percent won't see changes and this would affect small business owners and freelancers.
The Economic Outlook Under Labour
The party has emphasized its commitment to economic growth, with PM Starmer stating that "sustained growth will be their first mission for government." However, the road ahead may not be entirely smooth.
According to a report from the Financial Times, UK households could face an average annual tax rise of £800 after the election. This projection takes into account both Labour's proposed policies and the continuation of some existing Conservative plans.
What Does This Mean for Your Take Home Pay?
The impact of Labour's policies on individual pay will vary depending on your income level, employment status, and personal circumstances. Here are some key points to consider:
- If you're a basic rate taxpayer, you may see little immediate change in your take-home pay.
- Higher earners could potentially face increased tax burdens due to the continuation of frozen tax thresholds.
- If you currently benefit from non-dom status, you may see significant changes to your tax obligations.
- Families with children in private education may need to factor in potential VAT charges on school fees.
Labour's Vision for Economic Growth
While some of Labour's tax policies may lead to increased costs for certain groups, the party has emphasized its commitment to fostering economic growth. Their manifesto outlines plans for:
- Investing in green technologies and creating new jobs in the renewable energy sector.
- Improving infrastructure and connectivity across the UK.
- Boosting skills and training to enhance workforce productivity.
These initiatives aim to stimulate economic growth, which could potentially lead to increased wages and job opportunities in the long term.
Labour has pledged to "reset relations with NHS staff" and build a health service fit for the future. Some of their key promises include:
- Cutting waiting times by delivering an extra 2 million operations, scans, and appointments in their first year of government
- Paying staff overtime rates to work evenings and weekends to reduce backlogs
- Training thousands more GPs to improve access to primary care
- Shifting resources to primary care and trialing "Neighbourhood Health Centers"
- Creating a "National Care Service" to integrate health and social care
Labour aims to hit the 18-week NHS waiting time target within five years, addressing one of the most pressing issues facing the health service .
To fund these ambitious plans, Labour has proposed measures such as:
- Cracking down on tax avoidance and closing non-dom loopholes
- Reforming procurement processes to reduce waste
- Investing in preventative care to reduce long-term costs
However, some experts caution that significant public investment will be required to truly "save the NHS" and implement Labour's vision.
So, as the Labour Party takes the reins of government, the UK is poised for significant changes in its tax and economic policies. While some may see increases in their tax burdens, others may benefit from the party's focus on economic growth and job creation.
Election promises don't always translate directly into policy, and the full impact of Labour's win on your take home pay could take time to materialise. The new Chancellor Rachel Reeves' first Budget will be an important event on every financial analyst's calender.