The newly appointed government, led by Prime Minister Sir Kier Starmer, has already initiated several changes to legislation. One of the most significant areas they plan to reform is the realm of taxes, changes that will affect everyone from business owners to individual taxpayers. So, let's delve into what we can expect.
Personal Tax Changes
Labour has made it clear that there will be no increase in income tax or National Insurance rates in the near future. However, they will continue with the previous government's plan to freeze income tax and National Insurance thresholds until 2028. While this might sound like nothing will change, it will effectively raise income tax over time due to a phenomenon known as 'fiscal drag'. As wages increase with inflation, more people will find themselves paying higher tax rates as the thresholds will remain unchanged.
Abolishing Non-Dom Tax Status
Labour has pledged to abolish the current non-dom tax status, which allows people living in the UK with a permanent home outside the UK to avoid paying tax on foreign income. The purpose of this is to provide tax relief to people living here temporarily, and it has also made the UK an attractive destination for wealthy individuals to live and work. Although there are many rules around this status and not all non-doms avoid paying UK tax, a significant number use the scheme to avoid paying tax even if they have no intention to return to their country of domicile. The new reform will require anyone living in the UK for more than four years to be taxed like any other resident, potentially raising £2.6 billion over the course of the next parliament.
Ending VAT Exemption on Private School Fees
Currently, private schools benefit from a VAT exemption on their fees, which average £15,000 per pupil year. Labour plans to end this exemption, with the additional VAT revenue used to fund 6,500 extra teachers in state schools. Although this may lead to higher fees for private school pupils, it is estimated that the effective VAT rate will be closer to 15% since schools will now be able to reclaim VAT on expenses.
Employment Law Reform
The Labour government aims to make several changes to employment law, impacting both employers and employees. These include:
Banning Zero Hour Contracts: To end one-sided flexibility, everyone will have the right to a contract reflecting their regular hours, based on a 12-week assessment period. However, those preferring flexibility can choose to remain on flexible contracts.
Unfair Dismissal Protection: Making unfair dismissal protection a day-one right for all employees, as opposed to the current two-year requirement. This change will protect workers but may lead employers to be more cautious in their hiring practices.
Statutory Sick Pay (SSP): Making SSP a right from day one, removing the three-day waiting period and the wage threshold, which currently excludes many workers from claiming SSP. This will increase costs for employers but provide greater stability for workers.
Minimum Wage Adjustments: Labour plans to eliminate the age bands for minimum wage, ensuring all adults receive the same rate. They also propose calculating the minimum wage based on the cost of living, alongside other factors, potentially increasing wages for everyone. This could pose financial challenges for small businesses without additional government support.
Business tax plans
For businesses, Labour has promised not to increase the VAT rate from its current 20% or the corporation tax rate, which is capped at 25%. While a further rise in corporation tax is not expected, Labour has indicated that as we have the lowest corp tax rate in the G7, they may adjust the rate in response to changes made in other G7 countries to maintain competitiveness.
Reforming Business Rates
Labour intends to reform the business rates system to level the playing field between high street businesses and online giants. The current system taxes businesses based on property value, which disadvantages physical shops compared to online businesses- which is partially why so many highstreets are dwindling. Although the specifics are yet to be confirmed, the aim is to create a fairer system that raises the same amount of revenue.
The upcoming tax changes under the new Labour government aim to create a fairer tax system and enhance workers’ rights. These reforms are likely to spark significant discussion and debate. Stay tuned for updates as these changes come into effect, and we'll continue to break down what they mean for you.
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