Labour’s manifesto, followed by the publication on 29 July of further detail on a number of the priority tax commitments included in the manifesto, provides some answers. As a recap, the Government has already set out that they intend to include the following “revenue-raising” tax measures in the Budget, along with further detail on their policy design given each has been consulted on to varying degrees over the summer.
These measures, alongside a commitment to update on policies at the Budget to help close the tax gap, were estimated in Labour’s manifesto to raise in the region of £8.5bn by 2028/29.
Then there are those areas where we are not expecting changes. Labour’s manifesto pledged not to raise the basic, higher or additional rates of income tax, national insurance, VAT and the headline rate of corporation tax. While not legally binding, these pledges have been regularly repeated, even since the announcement of the £22bn “black hole”. It’s therefore looking unlikely that the Government would backtrack and increase rates in any of these areas.
While we are not anticipating rate rises in these areas, the possibility of the Government raising some additional revenue from these taxes is not completely ruled out. For example, the wording on the income tax pledge refers to rates only, while income tax thresholds (which it should be noted are devolved in Scotland) also play an important role in determining how much revenue is raised from the tax. There is already a plan in place to freeze thresholds until 2028. As incomes rise, fiscal drag will mean more people are paying tax or paying tax at a higher rate which will increase tax revenues in itself. The wording of the manifesto pledge could also provide the Government with flexibility to change the thresholds further. However, having made a wider pledge not to increase tax on “working people” it seems less likely that they would do this at the lower end of the spectrum.
The corporation tax pledge only refers to the headline rate, so it’s worthwhile noting that in the UK there is also a lower rate of corporation tax, known as the small profits rate. It’s also important to keep in mind that corporation tax revenue is driven by not only the rate but also the base – i.e. what is taxed, which is impacted by add backs for disallowable expenditure and deductions in determining total taxable profits, and we may see further detail on his in the business tax roadmap (see below).
While in opposition and since coming into power, Labour’s central mission has been to grow the economy and there has been strong recognition from the Government that businesses are a key part in delivering that growth. However, the Government has not shied away from the narrative that there are tough fiscal choices to be made, reducing any expectation that there will be room for further business tax incentives to be announced at Budget. Instead, the main business tax offer at this Budget is anticipated to be a tax roadmap for businesses which the Government has confirmed will be outlined on 30 October “to offer the certainty that encourages investment and gives business the confidence to grow.”
This is expected to include the manifesto pledges to cap the headline rate of corporation tax at 25% for the duration of Parliament and that full expensing and the Annual Investment Allowance will be maintained. Beyond that, there remains less clarity on what else could be included in the roadmap.
That the Government has called it a business tax roadmap suggests it will extend beyond corporation tax alone, perhaps similar to the 2016 business tax roadmap which covered areas from business rates to capital gains taxes (CGT) and delved into sector-specific issues such as the taxation of oil and gas.
Then there is the question of how detailed it will be on future policy, one area that springs to mind is the Government’s pledge to replace the current business rates system with one that levels “the playing field between the high street and online giants”. A big ambition but with little clarity so far on how it will be achieved.
The future of R&D tax incentives was one area that did not feature in Labour’s manifesto, but earlier in 2024 they published a Business Partnership for Growth paper indicating support for the incentives and their intention to maintain the current structure of research and development tax credits over the next Parliament. However, the paper also expressed a willingness to evaluate the impact of the scheme on a sector-by-sector basis, starting with life sciences. This suggests that they could look to make further changes to the regime in the medium to long term; despite giving some stability in the short term, and perhaps we could see more on future steps for evaluating the scheme in the roadmap.
We could also hear more on capital allowances and specifically whether full expensing will be extended to assets held for leasing, as had been under consideration by the previous Government, and Labour’s plans relating to their manifesto pledge to make the rules clearer around what qualifies for capital allowances.
Whatever the approach, as history – the Brexit referendum and COVID pandemic - has taught us with past roadmaps, there will be a delicate balancing act to be struck between providing sufficient detail to provide businesses with the confidence to invest versus providing sufficient flexibility to respond to external shocks and changing economic conditions.
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Lastly, there are the unknowns. While the Government has already identified and announced measures to find £5.5 billion of savings this year and £8.1 billion next year, this only goes some way to filling the £22bn “black hole”. The Government has been clear that there will be further “difficult decisions” to be taken at the Budget across spending, welfare and tax.
How, and the extent to which, the Government plans to reform UK taxes, or even introduce new ones, to raise additional revenue can only be speculated on. With the prime minister’s comments that “those with the broadest shoulders should bear the heavier burden” and the pledges limiting the options to increase the big revenue-raising taxes, attention is turning to how those taxes for which no such pledges have been made, such as inheritance tax and CGT, could be reformed to increase revenue.
Likewise, there has been a lot of speculation that the Government may introduce a flat rate of relief from income tax for pension contributions. With relief on pension contributions at an individual’s marginal rate of income tax, higher and many additional rate taxpayers currently benefit most from this relief so this policy change would fit with the narrative of focusing on those with the broadest shoulders. While conceptually simple, this has the potential to be significantly complex, particularly in its application to defined benefit schemes and it is likely to present administrative complications, for example where pension relief is currently operated through salary sacrifice arrangements.
In the run-up to the Budget on 30 October, our subject matter specialists will be exploring what reform across a range of taxes could look like in a series of deep-dive insights.
For more information and advice, contact Abby Agopian.
