UK Tax Policy Mid-Terms: #1 Labour

UK Tax Policy Mid-Terms: #1 Labour

Part 1 of 6 | The Government’s Report Card

Introduction

Two years ago, I reviewed Labour’s tax manifesto and concluded it was exactly what you’d expect from a party that was firmly in “not buggering it up” mode.

No surprises. No hostages to fortune. A carefully calibrated exercise in saying as little as possible while promising change.

Well, they won. And now we get to see how that manifesto held up against the realities of actually running the Treasury.

The Promises Kept

Let’s be fair. Labour delivered on quite a lot.

VAT on private schools?

Done. Implemented from January 2025, despite much wailing and gnashing of teeth from the Independent Schools Council about being “blindsided”… as if this hadn’t been Labour policy since approximately the Jurassic period.

And how’s that working out?

Well, we are told that over 100 private schools have closed. More than 25,000 children have been displaced into the state system.

The government’s own estimates show state school costs for absorbing these pupils at £270 million per annum against projected revenue of £460 million in year one.

Fees rose 22%, not the 10% Treasury predicted. The schools that closed weren’t Eton and Harrow, they’ll absorb it as a rounding error. The schools that did close were small faith schools, regional independents, the ‘affordable end’ of the market.

The policy has become a masterclass in achieving the opposite of its stated aims: minimal net revenue, maximum disruption, a legal challenge winding through the High Court, and the strange spectacle of a Labour government making private education more exclusive.

As fiscal policy, it’s borderline pointless. As ideological totem pole, apparently worth every penny.

Abolish the non-dom regime?

Done. The remittance basis went the way of the dodo (as it happens, the dodo died out just a century before the remittance basis was first introduced) from April 2025.

It has been replaced with the snappily-titled Foreign Income and Gains (FIG) regime, which sounds like an instagram detox programme, but is actually a four-year tax holiday for newcomers.

The Tories had already announced this was coming, so Labour essentially just refused to grandfather existing trusts. Even more teeth were gnashed. Behavioural consequences were threatened. Some people probably did leave for Monaco.

So, how’s it working out?

The OBR assumed 12% of non-doms would leave. The Henley Private Wealth Migration Report says 16,500 millionaires will depart in 2025 alone, the largest exodus the UK has ever recorded, taking an estimated £66 billion in investable assets with them.

That said, the Henley figures have been called into question.

The Adam Smith Institute calculates that each departing millionaire represents the tax take of 49 average earners.

The Treasury insists the policy will raise £33.8 billion over five years. Perhaps. But that forecast assumed the wealthy would grumble and stay. Instead, they’re grumbling and booking one-way tickets to Dubai, Milan, and Monaco.

The FIG regime, a four-year tax holiday for newcomers to the UK, might attract replacements. Or it might just remind everyone that Britain now taxes residents more harshly than most competitors. We’ll know in a few years whether the sums add up. The early signs are not encouraging.

Corporation tax capped at 25%? Kept.

Energy Profits Levy extended? Yep.

SDLT surcharge on non-residents increased? From 2% to 3%.

Foreigners buying UK property now face a potential 18% SDLT rate.

A popular tax is one paid by someone else… an even more popular tax is one paid by a foreigner who can’t vote.

So far, so manifesto.

The Promises… Lost in translation?

Here’s where it gets interesting.

Labour’s central tax promise was crystalline: “We will not increase taxes on working people.” Specifically, no increases to income tax, National Insurance, or VAT rates.

They kept the letter of this promise. The rates have remained unchanged.

But the spirit?

That’s been doing some heavy lifting.

The threshold freeze extension. Labour promised not to extend the frozen income tax thresholds beyond the Tories’ existing plans. At the 2025 Budget, Rachel Reeves extended them to 2031. The OBR estimates fiscal drag from frozen thresholds will pull 780,000 more people into paying tax for the first time.

Is freezing a threshold technically a “rate increase”? No. Does it feel like one when inflation has eaten your pay rise and you’re suddenly a higher-rate taxpayer? Absolutely.

The employers’ National Insurance hike. This was the big one. From April 2025: rate up from 13.8% to 15%, threshold down from £9,100 to £5,000. The OBR called it the biggest revenue-raiser since 1993.

Labour’s defence? Employers’ NI isn’t paid by “working people” — it’s paid by businesses.

I’m sure the workers whose pay rises evaporated (or whose jobs disappeared) appreciate the distinction.

The Manifesto Didn’t Mention…

The juiciest bits weren’t in the manifesto at all.

The “Tractor Tax.” From April 2026, Agricultural Property Relief and Business Property Relief, the valuable reliefs that have allowed family farms and businesses to pass to the next generation without a 40% haircut , are capped for the full, 100% relief. Above that, you pay IHT at 20%.

Farmers, quite literally, took to Westminster with their tractors.

Originally, the cap was £1m. However, Labour eventually softened it to £2.5 million (meaning married couples can pass on £5.65m tax-free when you include nil-rate bands).

But the damage was done.

Nothing says “party of working people” like a death tax on Farmer Giles.

High Value Council Tax Surcharge. Properties worth over £2 million now face a surcharge. Rachel Reeves pointed out that “the average Band D family home pays more in Council Tax than a £10 million property in Westminster.” Fair point. Still wasn’t in the manifesto.

Further, analysis set out in the Telegraph suggests, once again, this is another Labour policy that will cost, rather than raise, revenue.

Capital Gains Tax increases. The effective rate for Business Asset Disposal Relief rate has edged up to 18%.

Tax on rental income up 2% from April 2027.

Employee Ownership Trust relief halved.

Salary sacrifice pension contributions capped at £2,000 from 2029. Because apparently the middle classes were having far too much pension fun.

The Black Hole Defence

Labour’s explanation for all of this is the infamous “£22 billion black hole” inherited from the Conservatives.

The previous government, we are told, left the books in such a state that difficult choices were unavoidable.

Is this true?

Probably…to an extent. Indeed, the OBR did note that Labour discovered commitments that weren’t properly funded.

Is it the whole story? Of course not. Governments always inherit problems. What they choose to do about them is a choice.

Labour chose employers’ NI over a wealth tax. They chose IHT on farms over higher CGT rates across the board. They chose to extend threshold freezes rather than find cuts elsewhere.

These were all choices.

Conclusion: The Manifesto vs The Reality

 

Two years in, Labour has delivered most of its explicit promises whilst, at the same time, breaking the spirit of its central pledge.

The “working people” whose taxes wouldn’t rise have seen employers’ NI increase their labour costs, fiscal drag pull them into higher brackets, and a raft of stealth taxes on property, savings, and pensions.

The IHT changes were arguably the biggest unforced ‘error’. A policy that wasn’t in the manifesto, wasn’t demanded by the public, and united farmers, small business owners, and the guerillas in the Telegraph comment section in furious agreement.

As mid-term report cards go, it’s a solid C+.

Could do better.

Must try harder.

Definitely should have mentioned the tractor tax.

 

Next week…Reform UK and The £90 Billion Retreat