King's Speech: Tax - What's Next For Our New Government?
The Kings Speech does not include details of actual tax changes, which will come in the new Government’s first Budget, likely to be in October. It did however include reference to one tax provision, in the Budget Responsibility Bill, to legislate good fiscal practice. The Speech started: “Stability will be the cornerstone of my Government’s economic policy and every decision will be consistent with its fiscal rules. It will legislate to ensure that all significant tax and spending changes are subject to an independent assessment by the Office for Budget Responsibility.” (OBR). This is clearly a response to former PM, Liz Truss’s infamous “fiscal event”, which was done without any reference to the OBR, and is blamed for a severe effect on interest rates and the British economy.
So what tax changes do we expect in October? First we must consider the Manifesto provisions, where Labour ruled out increasing rates of income tax, National Insurance (NI), corporation tax (capping at the current level of 25%) and VAT (the four biggest taxes, raising over 70% of the total annual tax raised).
Labour's manifesto contained no tax surprises but did set out plans to generate £8.6 billion in extra tax revenue through a range of previously announced policies:-
- Closing further non-dom tax loopholes and investing in reducing tax avoidance (£5,230m) (NB. Notwithstanding the description this includes broader measures to reduce the tax gap)
- Applying VAT and business rates to private schools (£1,510m)
- Closing carried interest tax loophole (£565m)
- Increasing SDLT on purchases of residential property by non-UK residents by 1% (£40m)
- Windfall tax on oil and gas giants (£1,200m)
The party plans also include:
- Retaining a permanent full expensing system for capital investment
- Replacing business rates with a new system to level the playing field between the high street and online giants.
- Publishing a roadmap for business taxation for the next parliament.
- Commitment to one major fiscal event a year – rather than the current mix of Spring and Autumn events.
- improving tax compliance, modernising HMRC, changing the law to tackle tax avoidance, increasing registration and reporting requirements, enhancing HMRC’s powers, investing in new technology and building capacity within HMRC.
Responding to the manifesto, Paul Johnson from the IFS described the tax and spending increases announced as ‘trivial’, warning Labour has left itself “no room” within fiscal rules for any more spending than planned by the current government.
It appears that Labour will maintain existing plans to keep income tax thresholds frozen. The freeze on the personal allowance is set to continue until 2028, under the “stealth taxation” developed by the current government over the last few years. IHT allowances are also frozen and CGT allowances have been cut. Labour have said that when the finances allow they want to raise thresholds, but the figures are very tight at the moment.
The Financial Times reported that Labour dropped plans to reintroduce the pensions lifetime allowance, with concern it would add uncertainty for savers and be complex to deliver. Labour have also said they cannot match the Conservatives’ planned 2p cut to national insurance because “the money simply isn’t there”. The Conservatives did challenge Labour to match their pledge to freeze the number of council tax bands. While a spokesman has said reforming council tax is “not something that we’re planning to do”, the current valuation of properties for council tax is much criticised as being over 30 years out of date and there is some logic in reviewing this.
Caveat: Alongside the IFS, Bloomberg Economics has also produced analysis to show that substantial tax rises are likely to be needed to meet the “fiscal rules” set by the Tories but also agreed by Labour, that debt as a share of GDP should fall by the 5th year. They estimate that “further fiscal tightening” of around £45bn will be required by 2028-29, i.e. major tax increases or substantial expenditure cuts (a further period of “austerity”?).
As the dust settles, given this caveat, all eyes are now on the new Chancellor, Rachel Reeves, to see how Labour will use their huge majority, to change tax policies in reality. While the Chancellor hopes the big push for growth will produce the much needed funds, if this takes longer to arrive than hoped, what tax changes might be made to avoid drastic spending cuts?
