Labour’s Tax Reforms: What to Expect

The Labour Party has formed a government on the basis of not increasing income tax rates for “working people”. According to published manifesto commitments, the party has outlined measures intended to raise approximately £8.5 billion annually by 2028–29. This has prompted discussion about how the additional revenue would be generated and which sectors may be affected.

Under the Charter for Budget Responsibility, the Office for Budget Responsibility is normally required to publish an economic forecast alongside a Budget. The timing of any fiscal event therefore depends on this process and formal government scheduling. Meanwhile, Below is a summary of proposals outlined in Labour’s manifesto and related public statements. Final implementation will depend on future legislation and Finance Bills.

Additional revenue (2028-29)	£m
Charging carried interest to income tax instead of CGT	565
Adding 1% to SDLT on purchases of residential property by non-UK residents	40
VAT and business rates from private schools	1,510
Non-dom tax changes and investment in reducing tax avoidance	5,230
Additional windfall tax on oil and gas companies	1,200
Rounding	5
Total	8,550

Income-tax

While Labour has stated it does not intend to increase headline income tax rates, it has indicated that income tax thresholds may remain frozen until April 2028. If thresholds remain unchanged, fiscal drag could result in more income being taxed at higher rates over time. As incomes rise over time, a larger proportion of people’s earnings will become subject to taxation, and a greater share of taxable income will fall into higher tax brackets. Consequently, despite the nominal promise of no tax increases, this approach will lead to a gradual expansion of the tax base and increased tax revenue.

One group potentially affected is private equity fund managers, particularly in relation to the tax treatment of carried interest. The party aims to address what it terms a ‘loophole’ in the current tax system. Under this proposal, the carried interest of private equity fund managers, which is presently subject to capital gains tax (CGT), would instead be charged as income tax.

 This change could substantially increase the tax burden for these professionals, given the typically higher rates of income tax compared to CGT. However, the new Chancellor of the Exchequer, Rachel Reeves, has introduced a potential caveat to this policy. She suggests that capital gains treatment might still apply in circumstances where private equity managers are “putting their own capital at risk.”

Example:

John is an additional rate taxpayer and receives carried interest of £400,000.

Speak to our team about planning ahead through wealth management services or personalised tax planning support.

If the interest is taxable as a capital gain, John will pay CGT of £112,000 (28% on £400,000).

If the interest is instead taxable as income, If treated as income, the amount could be subject to income tax at additional rate levels. National Insurance implications would depend on the individual’s employment status and structure.

Tax on capital gains

Labour’s manifesto did not include specific commitments regarding capital gains tax (CGT). However, during the election campaign, Sir Keir Starmer provided one clear assurance: under a Labour government, individuals selling their main residence would not be subject to CGT.

Starmer’s careful avoidance of ruling out CGT increases in other areas has fuelled speculation about potential reforms to this tax. Nevertheless, he has emphasized that Labour’s plans are “fully funded and fully cost,” asserting that they do not necessitate tax increases beyond those already announced.

SDLT

Under current regulations, non-UK resident individuals purchasing residential property in England or Northern Ireland are subject to a 2% surcharge on Stamp Duty Land Tax (SDLT), in addition to the standard rates applicable to UK residents. Labour’s proposed policy aims to increase this surcharge to 3%.

Example:

SDLT liabilities depend on prevailing rates published by HM Revenue and Customs. Individuals should review the latest rates on GOV.UK before completing a transaction. 

Company tax

It is anticipated that the government will deliver a comprehensive five-year business tax roadmap within the next six months. This initiative aims to provide businesses with a clear framework for investment planning, enhancing confidence in long-term decision-making.

Additionally, more detailed guidance is expected to clarify eligibility criteria for full expensing and the annual investment allowance.

VAT

Labour proposes to eliminate the VAT exemption for private schools, a key policy initiative that would apply VAT to school fees. While initially slated for immediate implementation, Chancellor Reeves has clarified that this change will be introduced in Labour’s first Budget, without retrospective application.

 The new policy could potentially take effect from January 2025, though a September 2025 start, aligning with the 2025-26 academic year, seems more probable.

Previous media reports suggested Labour’s intention to retrospectively tax advanced payments, though the feasibility of this approach under current VAT law principles remains unclear.

Non-doms

Prior to the election call, the Conservative government had proposed significant reforms to the non-dom tax regime in the 2024 Spring Budget, set to take effect from April 2025. These changes aligned with Labour’s pre-existing plans. However, the Conservative proposals have not yet been enacted into law.

It is anticipated that any draft legislation will be revised to incorporate Labour’s more comprehensive approach, which aims to Replace the current non-dom regime with a revised residence-based system, subject to parliamentary approval and legislation.

Inheritance tax

Labour’s manifesto makes a single, yet significant, mention of inheritance tax (IHT): a pledge to eliminate “the use of offshore trusts to avoid inheritance tax.” While acknowledging that offshore trust structures can serve legitimate and legal purposes, this proposal seems rooted in findings from a 2018 report commissioned by the previous Conservative government. The report highlighted tax avoidance as a primary motivation for establishing offshore trusts.

Industry commentators have discussed the possibility of wider inheritance tax reforms, although no detailed legislation has yet been published. Industry experts anticipate possible changes to agricultural property relief and business property relief, potentially making these provisions less generous. Any such reforms are likely to begin with a consultation process, which could commence as early as this autumn.

Windfall tax

Regarding the Energy Profits Levy imposed on the profits of producers of gas and oil, Labour has committed to:

1. Eliminating investment allowances for oil and gas companies.
2. Extending the levy until the end of the current parliament,
3. Raising the levy by an additional three percentage points,

Tax Avoidance

Labour’s plan to boost tax revenue largely relies on tackling tax avoidance. To close the tax gap, the party proposes a pronged approach:

Enhancing HMRC’s compliance capabilities by hiring and training an additional 5,000 staff, investing in technology to modernize the tax system, and introducing legal reforms to effectively deter tax evasion.

Additionally, Labour plans to explore expanding the scope of reportable tax avoidance schemes under DOTAS rules and empowering HMRC to collect disputed taxes from investigated taxpayers.

One Budget a Year

Labour has pledged to introduce a single major fiscal event annually, providing families and businesses with advance notice of tax and spending policies. Consistent with its earlier statement promising “One Budget every autumn, at least four months before the new tax year”, we anticipate significant tax announcements to be made only once a year, each autumn.

If you want to know more about how any of these prospective changes will affect you or your business please contact us.

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