General election tax policies: What to expect
Following the Prime Minister’s recent announcement that the 2024 General Election would be held on the 4th July all of the UK’s political parties have been promising various policies to improve the country, along with these policies there have been various statements about plans for the UK tax system. The next government will have to raise money to fund its policies and public services. Tax is one of the tools the government turns to first. However, many politicians have promised to freeze certain taxes so as not to exacerbate the difficulties faced by people paying for housing, bills and necessities. We have put together a brief summary of the major parties’ promises and aspirations for the UK tax system following the July election so you can know what to expect following the outcome of the election.
The current tax system
Tax policies are a key issue in the general election, as they directly impact the economy and the day-to-day lives of individuals and businesses. Most parties announce changes to the tax rates rather than entirely new taxes therefore knowing the main rates is helpful to understand how the policies affect you and if they amount to a tax rise or cut.
For income tax the current bands and rates are:
- 0% tax on your personal allowance of up to £12,570
- 20% Basic rate tax on earnings between £12,571 and £50,270
- 40% Higher rate tax on earnings between £50,271 and £125,140
- 45% Additional rate tax on earnings above £125,140
In addition to these there are National Insurance contributions (NICs) that both employees and employers must pay; the most common NIC bracket is class 1A which employees must pay 8% of income between £242.01 to £967 per week and 2% on income Over £967 per week, with nothing due on the first £242 earned a week. Self employed individuals pay a different class of NICs depending on income level with most paying class 4 NICs which are 6% on profits between £12,570 and £50,270 and 2% on profits over £50,270.
The standard Value Added Tax (VAT) rate is is currently 20% with some goods eligible for the reduced rate of 5% and some goods zero rated. The registration threshold for businesses to register for VAT recently increased in the Spring Budget to £90,000.
Finally, corporation tax currently is 19% for companies making under £50,000 per year with companies earning above this amount subject to the main rate of 25%. Companies earning between £50,000 and £250,000 pay corporation tax at the main rate but are subject to marginal relief which provides companies with a gradual increase in the effective corporation rate.
What policies could change after the general election?
After the general election, the next parliament will have the power to enact new tax policies and make changes to the existing ones. The policies that could change will depend on the manifesto pledges of the winning party or parties. The incumbent Conservative government has committed to maintaining the current income tax thresholds and Rishi Sunak has repeatedly stated that there are long term plans to axe national insurance contributions.
The Labour leader, Sir Keir Starmer, has made several tax-related promises so far in their campaign. One of the key areas of focus for Labour is making the tax system fairer, they have expressed their commitment to addressing tax avoidance, which is the legal use of loopholes to reduce tax liabilities. Labour’s manifesto is likely to include measures to close these loopholes and ensure that everyone pays their fair share of taxes.
The Liberal Democrats, led by their leader Sir Ed Davey, have also spoken about taxes and public finances. The party has pledged not to raise income tax or national insurance as well. However, they have proposed increasing taxes on in-scope companies and share buybacks of FTSE 100 companies. These measures are aimed at ensuring that corporations contribute their fair share to the economy.
It is important to note that the specific details of these policies will be outlined in the respective party manifestos. The next parliament will have the opportunity to debate and vote on these policies, and any changes will be subject to parliamentary approval.
What are the main tax policies for the election?
Income Tax and National Insurance
Income tax and national insurance are two key components of the UK tax system, cuts to income tax and NICs result in more money in your pocket and therefore tend to be popular policies for politicians to pursue. That said, both Labour and the Conservatives have expressly pledged to keep income tax thresholds frozen until 2028 and not look to raise the rate of income tax if they are to win the election. The Liberal Democrats also have indicated they are not planning to change income tax rates or thresholds.
Current Chancellor Jeremy Hunt has spoken out about the Conservative’s plans to reduce distortions in the income tax system to reduce high effective tax rates at some of the thresholds, particularly those for higher earners where they have their personal allowance reduced when earning above £100,000. He also mentioned a longer term plan to abolish National Insurance when the government can afford to cut this substantial stream of revenue that funds the state pension and statutory sick pay among other things. Labour have been more cautious in approaching potential NIC cuts and do not wish to make any commitments until they have a firm plan to finance any such changes to government revenues.
The main political parties have also committed to maintaining the pensions triple lock which means the state pension rises in line with the highest of average earnings, inflation or 2.5%. The Conservatives have also announced a triple lock plus whereby the personal allowance for pensioners will increase by the same amount as the triple lock to ensure that the state pension, on its own, will not force people into paying income tax.
VAT
Value Added Tax (VAT) is a consumption tax that is levied on the sale of goods and services in the UK. No parties have announced any plans to change VAT substantially or the classifications of goods into the 20% standard rate and the 5% reduced rate.
One notable exception is Labour’s policy to abolish the VAT exemption for private schools. This would mean that 20% rate is applicable to private school fees which is one potential way of raising the funding to support some of Labour’s other policies.
Business taxes
The Liberal Democrats have proposed the most changes to taxes levied on businesses of any of the parties. They have announced plans to triple the digital services tax from its current level of 2% in order to raise more funding from tech giants such as Amazon, Facebook and Google. Furthermore the Lib Dems wish to introduce a new 4% tax on share buybacks of FTSE 100 companies.
For smaller businesses there have been no direct announcements affecting directors or firms. Labour have promised to not raise the headline rate of corporation tax any higher than the current rate of 25% and the Conservatives wish to help businesses but have not committed to specific policies or a timeframe in which these changes may occur.
Can We Expect Any Immediate Tax Changes After the Election?
Immediate tax changes after the election are unlikely due to the need for parliamentary approval and a tentative approach by all parties to significant changes to the status quo. Due to parties committing to freezing income tax thresholds until 2028 there is no expectation of an immediate change in peoples’ take home pay and any changes to NICs will not come into effect for some time.