The Labour Government’s First Budget: What to Expect and What’s at Stake

The Labour government’s first budget is fast approaching, and their strategy has been one of deliberate leaks—letting potential policies float out into the public sphere and gauging the reaction. It appears to be a method of trial by fire: whichever policy provokes the most outrage is quietly shelved, while the others remain in play. Some of the proposals floating around sound pretty painful.

Nonetheless, it’s our job to dissect these proposals and break down what’s actually happening. Here are the key changes you might want to brace for:

Capital Gains Tax (CGT) Overhaul

Changes to the Capital Gains Tax could hit hard. The government may reduce or entirely scrap the annual CGT exempt amount (currently ￡3,000). Worse yet, CGT rates could be hiked, potentially aligning with income tax rates. For those selling assets like property or businesses, this could mean a jump from 20% to as high as 39%—a pretty steep climb. On the upside, there’s no indication of an “exit tax” for entrepreneurs moving abroad before selling their businesses. Fleeing to Dubai, it seems, remains a viable escape route for those seeking to avoid the hit.

Inheritance Tax (IHT) Tweaks

Speculation is rife that Inheritance Tax reliefs, particularly Business Property Relief (BPR) and Agricultural Property Relief (APR), could be slashed. Previously, assets held in a trading company could escape IHT after a two-year qualifying period. This had been a highly effective tax-planning tool, but it’s now under threat. The proposed changes could make it more difficult to pass down businesses without a significant tax burden.

Pensions Tax Relief Reforms

One of the more controversial proposals is the shift to a flat rate of tax relief on pension contributions, potentially between 25-30%. This would disproportionately hurt higher earners, who currently enjoy the most generous tax reliefs. However, for lower-income earners and non-taxpayers, this shift could provide a welcome boost to their pension pots.

National Insurance on Pensions

A painful possibility looms for employers as pension contributions may become subject to National Insurance. This would raise costs for businesses, likely leading to reduced employee benefits and making pension schemes less attractive. The blow here is twofold: more expense for employers and a weaker retirement safety net for employees.

Dividend Taxation Changes

Labour may further reduce the already small tax-free allowance on dividends (currently ￡500) and raise dividend tax rates. These changes could hit small business owners and investors hard, making dividend income significantly less attractive. For many, it will feel like Chairman Starmer is wielding a socialist scythe, cutting into income streams that have traditionally been treated more leniently than earned wages.

Non-Dom Tax Regime Shake-Up

Perhaps the most headline-grabbing proposal is the Labour commitment to abolishing the current non-domicile tax regime. From 2025, a new residence-based system could replace it, affecting wealthy individuals with offshore investments. While such a reform might sound fair in principle, it comes with a challenge: these high-net-worth individuals are notoriously elusive when it comes to tax. Many could simply pack up and move to more tax-friendly jurisdictions, depriving the UK of potential revenue altogether.

The Entrepreneur Exodus: A Real Concern

Now, let’s address the elephant in the room: if the government presses forward with these punitive measures, many entrepreneurs will simply leave the country. Without an exit tax in place, they have no reason to stay, and may never return. The UK could see itself losing out on the very revenue it hopes to capture. Why? Instead of taxing these entrepreneurs at a rate of 39% on their business sales, the government could end up with 0%.

This brain drain could have long-term consequences. The UK may become an unattractive place to do business, stifling innovation and driving talent abroad. Instead of this heavy-handed approach, Labour might consider bringing back the ￡10 million limit on Business Property Relief. This would keep successful entrepreneurs in the UK, while still allowing the government to collect its share of tax from their future gains.

What Could Be Done Differently?

Here are some alternative solutions to boost tax revenue without driving business owners away:

Borrowing for Investment

One viable option for the government is tonbsp;increase borrowing, but to do so strategically. Rather than simply borrowing to cover existing costs, the focus should be on job creation and infrastructure development. By investing in sectors that promote growth, such as green technology or public infrastructure, the government can stimulate the economy and create new employment opportunities. The tax revenue generated from these jobs would eventually help offset the cost of borrowing, making this a longer-term, sustainable approach to managing the budget.

Cutting Foreign Intervention Costs

Another area ripe for reform is the country’s spending on foreign interventions. The UK has often found itself involved in expensive overseas conflicts that yield little return for its citizens. By reducing military and foreign policy expenditures, the government could redirect funds towards domestic priorities like healthcare, education, or economic stimulus. Scaling back on these costly international ventures could provide much-needed relief for the national budget without directly burdening taxpayers.

Planning Law Reform

The UK’s restrictive planning laws are a bottleneck for development, delaying the construction of much-needed housing and infrastructure projects. By reforming these laws, the government could expedite projects that not only provide jobs but also generate revenue. Publicly funded developments like housing or transport infrastructure could yield long-term financial returns if managed correctly, and the government could capitalize on this instead of handing profits over to private landlords and corporations. Reforming planning laws would also help address the chronic housing shortage, offering a social benefit alongside financial gains.

Taxing the Gambling Industry

The gambling sector is another area where the government could extract more revenue. Raising taxes on gambling companies would have a dual benefit: it would not only provide a boost to public finances but also discourage excessive gambling, which is often linked to social issues. By imposing higher taxes on an industry that profits from the public’s losses, the government can claim a socially responsible victory while addressing its fiscal challenges.

Closing Tax Loopholes for Multinationals

Large multinational corporations often use offshore structures to avoid paying taxes on their UK profits. Closing these loopholes and ensuring that companies pay their fair share could result in significant revenue gains for the government. By cracking down on tax avoidance, the government would also create a more level playing field for smaller businesses, which often suffer from unfair competition due to the tax advantages enjoyed by larger, global companies.

Establishing a Government Investment Bank

More radically, the government could consider creating a state-run investment bank to address liquidity gaps in critical sectors like infrastructure. By increasing the liquidity reserve requirements for private banks, the government could step in to make direct investments in areas like transport, energy, and housing. This would create jobs, boost economic growth, and generate future tax receipts. Such a move could provide a sustainable way of driving long-term prosperity while improving the country’s essential services and infrastructure, ultimately creating a self-reinforcing cycle of investment and growth.?

Final Thoughts

While Labour’s upcoming budget proposals may seem like a sledgehammer approach, there are alternatives that could still deliver the necessary revenue without harming the country’s entrepreneurial spirit. The challenge lies in balancing the need for fairness with the reality that overly aggressive tax policies could end up driving away the very people who fuel the economy. It’s a tightrope walk—and one the government will need to tread carefully.