On 4 July, the country will vote in the first general election in nearly five years. Back in 2019, Boris Johnson led the Conservatives to a 40-seat majority, however, times have changed significantly with the cost of living crisis and COVID-19 pandemic leading to a very different economic situation today.

In this article, we summarise and comment on some specific tax-related policies announced by the projected four largest parties in England. This is by no means an exhaustive list of all announcements, nor is it intended to be any endorsement of the parties or individual policies. Rather our comments are intended to reflect the potential practical realities and changes from the current rules.

Conservatives

The Conservative manifesto includes brief statements on Income Tax and Corporation Tax, stating that neither will ‘increase’ should they be returned to Government. No further business tax measures have been announced. In addition, they also make a number of more detailed announcements.

National Insurance – Reduce Employee’s NI by 2% by April 2027 (8% to 6%) and abolish Class 2 NI for the self-employed by the end of the next Parliament (no later than 2030).

COMMENT – An employee on the average UK wage (£35,724) would save £454 per year based on this policy. A self-employed worker making the same profit would save £1,389 once Class 2 was fully abolished. This continues the downward trend in NI rates under the Conservatives in the last couple of years but it must be noted that Employer’s NI has not decreased from 13.8% in line with these reductions for employees, so businesses have not seen any reductions in tax.

Personal Allowance – To increase the personal allowance for pensioners in line with the existing ‘Triple Lock’ state pension pledge, ‘ensuring that state pension is not liable to income tax’. There would be an ‘age-related’ personal allowance.

COMMENT – This would mean a return to the two-tiered personal allowance which we haven’t seen since 2015-16. Regardless of who the new Government is, with all major parties other than Reform likely to freeze tax thresholds, if we do not want to bring nearly all pensioners into self-assessment due to fiscal drag, this area will likely need to be revisited during the next Parliament.

High Income Child Benefit Charge – Moving from an individual basis to assessing combined household income and increasing the threshold for clawback to £120k.

COMMENT – Essentially doubling this threshold from the current £60k for any one parent will allow many of those who either halted or never claimed Child Benefit to start making claims. However, there remains no perfect solution to ensure total fairness in the application of this charge. We can also see unintended consequences where an individual faces a 70% marginal rate of tax on some income where this clawback is combined with student loan repayments and the withdrawal of the personal allowance.

Stamp Duty on Residential Property – Extend the zero-rate band for SDLT to £425k for the first-time buyer and introduce a new help to buy equity loan scheme of up to 20% towards the cost of a new build home.

COMMENT – The current zero rate band for stamp duty is up to £250k (until 31 March 2025), so there is a potential saving of up to £8,750 from this measure today and up to £15,000 from 1 April 2025 – but only for first time buyers. We have seen various help to buy schemes before and their uptake has depended on the practicality of the various conditions attached to them.

Labour

Labour have chosen to avoid making lots of detailed commitments in their manifesto. However, it does rule out increasing Income Tax, National Insurance, VAT and has subsequently confirmed there are no plans to change the personal allowance or Income Tax thresholds.

Corporation Tax – Main rate capped at 25% and they have confirmed the retention of Full Expensing and the Annual Investment Allowance. Labour will publish a ‘roadmap’ for business taxation for the next Parliament if elected to Government.

COMMENT – This is very much the current Corporation Tax rules and suggests that under a Labour Government there will not be any immediate changes in this area straight after the election. Labour has not mentioned any other business tax policies at the time of writing.

Private Schools – Bring fees into the scope of VAT and end their business rate relief eligibility.

COMMENT – This is not a simple policy to enact as any Government implementing such a measure will need to consider exactly how to categorise those schools they intend to bring into the scope of VAT. Furthermore, we don’t know whether fees for children with special needs or in nursery age education at private schools are intended to be caught by any proposed rules or would be exempt. It seems likely that many private schools would end up facing complex partial exemption calculations on every VAT return. VAT is already a very complicated tax so if this were to become law, it would need to be very carefully written. On rates, currently private schools receive relief of 80% under charity law. So, either Labour intends to remove their charitable status or would propose new legislation to explicitly deny rate relief. We expect that a school would be either caught by both measures, or neither of them.

Liberal Democrats

Like Labour, the Liberal Democrat manifesto contains few mentions of tax-related policies. Their only Income Tax commitment is that they would raise the personal allowance ‘when public finances allow’. On business taxes, they only mention Corporation Tax and merely state a desire to ‘increase the global minimum rate to 21%’.

Capital Gains Tax – Reform by ‘closing loopholes’ and introduce ‘inflation relief’. Increase annual allowance to £5,000 and introduce band of 40% for gains between £50,001 and £100,000 and 45% for gains over £100,000.

COMMENT – It is not explained what is meant by ‘closing loopholes’ nor the proposed ‘inflation relief’, however, we expect that the latter should take a similar form to the old Indexation Allowance. Whether the proposed rate changes would be for all gains or exclude residential property is also unclear. For larger gains on chargeable assets currently at the 20% rate though, this policy would increase the tax payable significantly.

Employment status - Review IR35 and ‘end retrospective tax charges’ such as the Loan Charge.

COMMENT – These have both been highly topical and controversial areas of tax in recent years. Unfortunately, there is no further detail available on either policy (neither is there on Reform’s policy to ‘abolish IR35’). Most commentators agree that distinguishing between employment, self-employment and being a ‘worker’ for both tax and employment law purposes remains a huge unresolved issue and needs a satisfactory long-term solution. The Loan Charge policy is very much a surprise as its application remains hugely controversial. It would be an extraordinary volte-face to be reversed in full and would be extremely interesting if any more detail emerges on exactly what is meant by to ‘end’ it.

Reform UK

Over the last few years, our team have attended several CPD courses where the lecturer opines that the UK tax system needs a radical overhaul. Of all the parties covered in this article, there is no doubt that Reform’s policies would see the biggest amount of change in recent memory. However, there is very limited detail on the specific nature of many of their manifesto promises.

Income Tax and National Insurance – Increase the higher rate starting point to £70,000 and the Personal Allowance to £20,000. Increase Employer’s NI on foreign nationals from 13.8% to 20%.

COMMENT – This represents a potential huge tax cut for individuals. An employee earning over £70,000 would save £5,432 per year in income tax. However, for businesses relying on foreign workers, the Employer’s NI policy represents a 45% increase in contributions. This policy is likely not to affect most businesses but could cause huge cost increases for a minority in certain sectors. We also wonder if this might drive down pay rates for jobs that utilise foreign workers where the employer seeks to reduce their additional NI costs, as they know the employee’s take home pay might still be higher even on a reduced gross wage.

Stamp Duty on Residential Property – Extend the SDLT zero rate band to £750,000 with rates of 2% between £750,001 and £1.5m and 4% over £1.5m.

COMMENT – This would create a very different regime under which SDLT on every residential property purchase would be reduced compared with the current bands and rates. With the average house price in England at £298,000 according to Gov.uk figures, it is likely that most property purchases would no longer attract a SDLT liability. It is unclear whether the 3% premium on multiple property ownership would change under Reform.

Inheritance Tax – No IHT on any estate with a value below £2m and the IHT rate reduced to 20% with an option to donate any amounts due to charity.

COMMENT – Without knowing if Reform propose to change any of the current exemptions or rules on lifetime transfers it is impossible to quantify the suggested savings to an estate as a result of this policy. However, with the latest Government statistics (July 2023) stating that only 3.73% of UK deaths resulted in an IHT charge, it is unlikely to affect most taxpayers.

Corporation Tax – Increase the ‘minimum profit threshold’ of £100,000 and initially reduce the main rate to 20%, then 15% in year 3.

COMMENT – We must assume that ‘minimum profit threshold’ means a new band of profits where no Corporation Tax is payable as this term does not appear to exist in current tax law. It is also unclear whether Reform proposes to do away with the current dual small and main rates with marginal relief. Whilst we cannot quantify with any certainty, as Reform wants to reduce the main rate, this should represent a general Corporation Tax cut for all companies.

VAT – Increase the registration threshold to £150,000.

COMMENT – The current threshold rose from £85,000 to £90,000 on 1 April 2024, the first rise in several years. Reform’s proposal increases it again by another 2/3rds. Whilst this would potentially remove a large number of smaller businesses from the scope of VAT, it does not address the ‘cliff edge’ problem in the current rules.

Business Asset Disposal Relief – Reduce ‘Entrepreneurs Tax‘ to 5%.

COMMENT – It seems that the commitment to reduce ‘Entrepreneurs Tax to 5%’ refers to Business Asset Disposal Relief. There is no mention of the current lifetime cap on this relief changing from £1m, so the most an individual could save compared with the current rules is £50,000 on a £1m capital gain.

Author: Peter Burns - Senior Client Manager @ England & Company