Pensions, ISAs and VAT on school fees - tax changes under Labour

Having covered capital gains tax and private equity taxation in our first article and inheritance tax and the end of the non-dom regime in our second , we turn to pensions, ISAs and private school fees in our third and final article covering likely tax changes under the new UK Labour government.

Pensions

There are two main potential changes to pensions that the Labour Government could make:

1.???????? A flat rate of tax relief for pension contributions; and

2.???????? Pension pots being subject to IHT.

As tax relief on pension contributions is at an individual’s marginal tax rate, the greatest tax savings generally go to those with higher incomes. The Labour Government could therefore implement a flat rate of tax relief, possibly at basic rate (20%) or 30%. However, this may reduce the incentive to save into pensions for many.

Moving to a flat rate of relief may remove a significant tax planning tool, as pension contributions can currently be used to manage taxable income to avoid tapers and cut-offs that result in very high marginal rates of tax. These include loss of the personal allowance, the higher income child benefit charge and the cut off for free childcare at taxable income of ￡100,000.

For those who already have large pension pots, extending IHT to pension savings could have a greater impact. Currently, these sit outside of an individual’s estate, and under certain circumstances pensions can be a very tax efficient way of passing wealth down the generations. This has encouraged a shift in the use of pensions from retirement income to avoiding inheritance tax, which would be ended by bringing pension pots into the IHT net.

ISAs

ISAs are a very generous and popular tax planning tool. This naturally comes at a large cost to the Exchequer, and so it is possible that the Labour Government may look to cap the benefits. The Resolution think tank has estimated that capping total ISA savings at ￡100,000 per person would raise ￡1bn per year, which would affect 1.5m households in the UK.

VAT on private school fees

Perhaps the most controversial proposal of all is the addition of VAT to school fees. Labour have said that they will not introduce this until 2025, but it is not clear whether this will be January 2025 or the start of the new school year at the end of summer 2025.?

It has widely been assumed in the media that the addition of VAT will increase fees by 20%. In reality the increase in fees may be closer to 15% as schools will be able to claim input VAT on some of their expenses.

It is also possible that VAT need not be charged on the full amount of the fees. Certain supplies may remain exempt from VAT, such as after-school care, and that these could be disaggregated from the overall fee so that VAT is not charged on them. Whether this will be possible depends on the details of the legislation.

One idea to counteract the introduction of VAT is to pre-pay school fees. However, this should be approached with caution. Some experts have suggested that many of these schemes could fail under existing VAT rules, and Labour have warned that they will introduce anti-forestalling legislation which could have retrospective effect.

Private schools have already had to deal with inflationary pressures, and fees have increased accordingly. It is not clear how many parents can withstand a further jump in fees, nor is it clear how many schools can afford to absorb costs to limit fee increases. (See this article from our Family Law team on the issues raised by a

If you wish to discuss any of the issues raise in this series, please get in touch with Aidan Roberson or Patrick TR Thornton .

The information contained in this article is general guidance only. The application and impact of laws can vary widely depending on the specific facts involved. The information in this article is provided with the understanding that the authors and presenters are not giving legal, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional legal, tax or other competent advisers. Before making any decision or taking any action, you should consult a Child & Child professional.