The announcement of potential tax rises from the new UK Labour Government, less than a month after taking office, has stirred a mix of concerns and expectations among financial professionals. While not entirely surprising, this development is set to impact various sectors significantly.
A New Chancellor’s Dilemma
Chancellor Rachel Reeves addressed the House of Commons, revealing a staggering £22 billion “black hole” in the public finances, attributed to unfunded pledges by the previous government. Reeves highlighted the gravity of the fiscal situation, stressing the need for immediate action to stabilise the economy. She committed to presenting full fiscal plans and a spending review at the upcoming Budget on 30 October.
Likely Tax Changes
- National Insurance Contributions (NICs): One of the immediate considerations is the reversal of recent NIC cuts. However, Labour’s manifesto pledge not to increase NICs, income tax, VAT, or corporation tax complicates this option. Any reversal would contradict their campaign promises, potentially undermining voter trust.
- Wealth Taxes: Inheritance Tax (IHT) and Capital Gains Tax (CGT) were notably absent from Labour’s manifesto, making them prime candidates for reform. The Resolution Foundation’s recent report emphasises the growing wealth disparity and suggests that changes to CGT and IHT could generate nearly £10 billion annually. This could be a significant step towards addressing the fiscal deficit without increasing headline tax rates.
- Pensions: Changes to pension tax relief and benefits are also on the table. Proposals include a flat 30% tax relief rate on contributions, which would impact higher-rate taxpayers, and potential reductions in the tax-free lump sum entitlement. These measures could raise additional revenue but may face resistance from those with substantial pension savings.
Implications for Accountants & Insolvency Practitioners
At DMC Recovery, it’s vital for us to consider the implications of potential tax changes, especially regarding capital taxes and the risk that Business Asset Disposal Relief might be eliminated. This change could result in an additional tax burden of over £100,000 for those closing a profitable business with assets exceeding £1 million. Additionally, we need to keep abreast of the following, in the best interests of our clients:
- Increased Personal Insolvencies: higher taxes on wealth and pensions could increase financial strain on individuals, leading to more personal insolvencies. We need to be prepared for a possible rise in cases and the complexities that may arise as a result of this.
- Business Impact: changes to business-related tax reliefs, especially those affecting farms and AIM shares, could impact the financial stability of enterprises. This could result in more corporate insolvencies or restructuring cases.
- Tax Planning Adjustments: advising clients on effective tax planning will become even more critical for us. We need to stay up to date with Budget announcements and be ready to provide guidance on minimising tax liabilities within the new framework.
The upcoming Budget by the new Labour Government signals a period of significant fiscal adjustment. While the exact measures remain to be seen, accountants and insolvency practitioners must prepare for a dynamic environment.
By staying informed and adapting strategies, we can continue to support clients through the challenging times ahead.
