The Chancellor is coming for wealth and reliefs in October

Paul Montague-Smith, senior counsel – public affairs at MRM, considers the first few weeks of the Labour Government, and Rachel Reeves paving the way for wealth tax hikes and relief clampdowns.

In the end the polls didn’t narrow and were pretty much right. Labour won a huge landslide majority with 412 seats and the Conservatives lost 251 seats, an astounding turnaround.

But Labour’s victory was on a low turnout. Its share of the vote was only very slightly higher than in 2019 and was mostly accounted for by the SNP collapse in Scotland.

In Wales Labour’s share of the vote was actually down 4%. In England it was up by only 0.5%.

The result was therefore more a severe beating by the electorate for the Conservatives, rather than a reflection of great enthusiasm for Labour.

Their first month in office has been largely focused on expectation management. Why?

Because they knew that their manifesto commitments on tax and spending were extremely modest and too limited to address the reality of the public finances. But there’s another reason – revenge.

Ever since Liam Byrne, the last Labour Chief Secretary to the Treasury, stupidly left a note to his successor saying, “there is no money”, Labour was an easy target for accusations of economic incompetence. Now it’s payback time.

Liz Truss’s disastrous budget gave Labour a similar gift which Rishi Sunak tried to recover from, but the party is now trying to drive home a narrative that it is the Conservatives who have been irresponsible with the public finances, have hidden the real position and have run away from making tough decisions in office.

It’s a tactic that they might find difficult to make stick, not least as the opposition had access to senior officials before the election to discuss their plans.

The Chancellor claims that the Tories left a £22bn hole – including public sector pay increases – in the public finances, which the new government will begin to address by cutting planned expenditure and efficiency savings to deliver over £5bn of savings this year.

The statement is designed to roll the pitch for her October budget, where further tax rises will be announced. The Government is saying it will stick to its manifesto promises on the big revenue raising taxes. Its language has also been about not raising taxes on ‘working people’.

That leaves wealth taxes, corporate reliefs, tax thresholds and pensions mostly in the frame.

Capital gains is likely to be a target for equalisation with income tax, which could potentially go a significant way to closing the £16bn gap remaining, depending on behavioural reactions.

Inheritance tax could be a target – it currently raises around £7.5bn each year from around 30,000 estates.

Corporate reliefs will surely be under the spotlight, but with growth being the Government’s central mission, it will need to tread carefully here.

Pensions tax relief could finally be an area targeted for reform. Pensioners have been comparatively well protected through the state pension triple lock.

Money paid into private pensions with the benefit of higher rate tax relief is often only taxed at the basic rate on the other side, because of sensible tax planning by individuals. Higher rate taxpayers have therefore been getting a very good deal from their pension contributions.

Some analysis suggests equalising the rate to 30% for everyone could help basic rate taxpayers have more income in retirement, while at the same time raising a few billion a year for the Government – perhaps enough to get rid of the two-child benefit cap on which it is under significant pressure.

With its mission for growth in mind the Government announced a Pensions Schemes Bill in the King’s Speech and launched a pensions review, the aim being – like the last government – to improve returns for pensioners and channel more investment into UK assets, including startups and infrastructure, as well as driving consolidation of both funds and pots.

Only time will tell whether ‘encouraging’ funds to invest in UK assets will actually lead to better outcomes for savers at the end of their working lives.

The only other financial services-related Bill in the legislative programme is to allow the Bank of England to use funds levied on the banking sector to cover the costs of resolving a failing bank.

But in its Finance for Growth document earlier this year Labour set out the following ambitions for government:

• build on the UK-EU Financial Services Memorandum of Understanding to deepen cooperation in emerging areas of financial services, such as green finance
• direct the FCA to issue an open call to industry to identify rules which have been made redundant by the Consumer Duty
• set clear standards for AI safety, and adopt an agile approach to regulation
• make the UK a global leader in tokenisation by advancing work to clarify the law and working with regulators to establish a proportionate, outcomes-based regulatory regime
• make the UK the green finance capital of the world
• expand banking hubs
• develop a national financial inclusion strategy
• close the advice gap through reform of the advice and guidance boundary
• work with industry to pilot innovative approaches for encouraging savings
• develop the next phase of Open Banking and embrace the potential of Open Finance to improve financial wellbeing

While it’s early days, the first month of the Labour government has been marked by a seriousness and resolve to move on their priorities at pace.

Part of this includes Westminster reform, to reinforce the message that the new government exists to serve the people. It is moving ahead with a ban on MPs having second jobs as parliamentary advisers.

Second jobs per se will still be allowed, so lawyers, doctors, dentists etc. can keep practising. Paid media appearances and after dinner speeches will also still be allowed, but the number of hours MPs can devote to non-parliamentary paid work may become subject to a cap – a change that many of us will welcome and some may be surprised is even needed.