Labour have announced plans to make sweeping changes to the UK tax system if elected, by raising the main rate of corporation tax, tax dividends and capital gains at the same rate as income, and abolish the vast majority of corporate tax reliefs, including Entrepreneur’s Relief.
The rate of corporation tax, which has been reduced by 9 per cent over the past decade, would be increased incrementally to 26 per cent by April 2022, increasing to 21 per cent next year and then rising to 24 per cent in April 2021.
Labour would also reintroduce the small companies’ rate of corporation tax, which was abolished in 2015, meaning companies with profits lower than £300,000 would be subject to a lower rate of corporation tax. This would also be raised incrementally from the current rate, to reach 21 per cent in April 2022. Small companies would pay 19 per cent in corporation tax next year and 20 per cent in 2021-22.
Labour claim that the changes to the corporation tax regime would raise £23.7 billion within five years.
In a move that would have a significant impact on many contract workers for contractor tax, the current lower rate of income tax on dividends would be eliminated and dividends taxed at the same rate as salaries. Dividends would remain outside of the scope of National Insurance, but the higher tax rate would severely reduce the fiscal benefits of working through a Personal Service Company.
Under Labour’s proposals, a limited company contractor on a daily rate of £450, operating “outside IR35”, with 10% expenses would pay more than £5,500 in additional contractor tax in 2022, compared to current levels of contractor taxes.
Capital gains would also be taxed at the same rate as income, and the separate annual exempt allowance for capital gains would be abolished, above a de minimis threshold of £1,000. Entrepreneur’s Relief, which has come under criticism recently for failing to achieve its objective of encouraging investment whilst enabling substantial tax savings for company owners, would also be scrapped as a part of a wider review of corporate tax reliefs.
The basic and higher rates of income tax would remain the same, whilst the 45p additional rate tax band would be lowered to £80,000 and a new “super-rich rate” of 50 per cent would be levied on any income over a threshold of £125,000. The previous 50 per cent rate introduced by the coalition government was abolished in 2014.
Labour’s manifesto, which has almost doubled the scale of the taxation and spending plans revealed in their 2017 manifesto, sparked fears across corporate Britain of a return to 1970s state intervention, and has been condemned by business leaders and economists who believe the plans will stymie the UK’s economic growth.
Independent think-tank the Institute for Fiscal Studies (IFS) said the manifesto would create “just about the most punitive corporate tax regime in the world”, with the burden eventually falling on individuals with contractor tax, even if the intended targets are corporations and the wealthy.
Labour leader Jeremy Corbyn defended the party’s policies on Friday, insisting that the tax increases will not affect the vast majority of the UK’s population: “We have been very straight: 95 per cent of the population will not pay any more income tax; the richest 5 per cent will pay a bit more, the biggest corporations will pay more,” said Mr Corbyn at a visit to a pottery factory in Stoke-on-Trent.
Shadow chancellor John McDonnell said the IFS had “got it wrong”.
“I have a great deal of respect for the IFS, of course I do,” he told the BBC on Friday morning. “I just think they’ve got it wrong on this one.
“What we’re saying is with the structural changes we will make in the economy, we’ll make sure that actually the corporations themselves do not take that easy option of cutting wages or rising prices [to pass on tax rises],” he said.
Labour’s policies would increase overall taxation by £80 billion annually. They would also increase borrowing to £400 billion over a single parliamentary term.
Other plans announced in the manifesto include an £11 billion windfall tax on oil and gas companies, extension of the sugar tax to milk drinks, the abolition of the rarely-used marriage allowance and an extension of stamp reserve duty on share sales. VAT would also be charged on private school fees.
Inheritance tax cuts made by George Osbourne, described by Treasury analysis as “most likely benefit high income and wealthier households”, would be reversed, with inheritance tax potentially to be replaced by a lifetime giving tax, charged at the income tax rate for assets worth over £125,000. The current inheritance tax regime gives individuals a £325,000 tax-free allowance with a £150,000 transferable property relief rate.
The increased taxation would be used to pay for Labour policy proposals which include the nationalisation of water, the railways, Royal Mail, the National Grid and Openreach broadband, raising the minimum wage from £8.21 to £10 an hour, the building of 1 million new council homes, provision of free personal care for the elderly, £26 billion investment in the NHS and the scrapping of universal credit.
The Conservative Party’s manifesto is due to be launched this Sunday, November 24th.
22nd November 2019.