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Labour's manifesto plans: do the sums add up?

Labour's manifesto plans: do the sums add up?

by Daniel Grote May 17, 2017 at 07:59

Labour has outlined plans to raise £48.6 billion in taxes, including a hike in income tax to 45% for those earning £80,000 and above, which it claimed would fully fund its manifesto spending commitments such as the scrapping of university tuition fees.

The party, led by Jeremy Corbyn (pictured), claimed it would raise £6.4 billion a year by lowering the threshold for the 45% rate from its current £150,000 level to £80,000. Those earning between £123,000 and £150,000 will see their income tax rate raised from 40% to 50%, while current 45% payers, those earning over £150,000, will pay the 50% rate.

It has meanwhile committed to no income tax rises for those earning below £80,000, and no national insurance or VAT rises.

‘We will not ask ordinary households to pay more,’ reads the manifesto. ‘Only the top 5% of earners will be asked to contribute more in tax to help fund our public services.’

The plans drew criticism from the Institute for Fiscal Studies, which said the changes missed ‘an opportunity to rationalise the income tax system for those on higher incomes’.

The thinktank pointed to the gradual withdrawal of the £11,500 tax-free personal allowance, which starts to decreases once someone earns £100,000 at a rate of £1 lost for every additional £2 earned, meaning those on £123,000 or above receive none.

By keeping that reduction in place, those earning between £100,000 and £123,000, hit by both the income tax rise and the personal allowance cut would pay more marginal income tax - the amount of tax on each additional £1 earned - than even those over the 50% tax threshold. The IFS estimated the effective marginal income tax paid by those in this bracket would reach as high as 67.5%.

Pensions problem

The IFS also questioned Labour’s ability to raise £6.4 billion through widening the 45% tax band. With Labour having no plans to change the system of pension tax relief, which gives relief at the marginal rate of income tax paid, those hit by the 45% rate could avoid it by placing that money in a pension.

‘Many would take action to reduce their taxable income in response: for example by increasing contributions to private pensions,’ said IFS associate director Robert Joyce.

‘Because the extent of those kinds of responses is very uncertain, the amount of extra revenue these higher taxes would raise is also very uncertain.’

Richard Parkin, head of pensions policy at fund group Fidelity, said it was odd that Labour had not tackled pensions tax relief.  

‘I’m surprised that there has been no reference to tax relief reform and, in particular, a shift to a more redistributive policy here,’ he said.

‘Nor is there any mention of any rethink on pension freedom which they have expressed concern about in the past. In fact the manifesto is silent on if and how private pensions would be reformed at all beyond another swipe at hidden rip-off fees and charges.’

Corporation tax cash cow

But Labour’s biggest revenue-raising measure, on its calculations, will come from raising corporation tax, which it claims would bring in £19.4 billion. Currently 19%, it is due to fall to 17% by 2020 under the Conservative plan announced in the previous parliament. Labour would reverse this if elected, raising the tax rate to 21% next year and bumping it up to 24% the following year and 26% the year after that.

That would bring it just below the 28% rate at which it stood under the last Labour government in 2010, in a trend of undoing Tory tax cuts that runs through the manifesto.

The party would also reintroduce the ‘small profits rate’, effectively scrapped with the cut in the headline rate to 20% in 2015, meaning companies with earnings below £300,000 a year would not face as steep a rise. Their rate would increase to 20% for next year and the year after, rising to 21% after that.

‘Corporation tax in the UK is the lowest of any major developed economy,’ reads the manifesto. ‘Our new settlement with business will ask large corporations to pay a little more while still keeping UK corporation tax among the lowest of the major developed economies.’

IFS associate director Helen Miller conceded the move ‘would, just, leave the UK with the lowest headline corporation tax in the G7’.

‘But we would move down the competitiveness ranking relative to some other European Union countries,’ she added. ‘A higher rate would also reduce the incentive for both domestic and multinational companies to invest in the UK, which might cause concern as we prepare to leave the EU.’

Labour claims a further £3.7 billion from a series of reversals of Tory policy. It will repeal last year’s cut to capital gains tax, from 18% to 10% for basic rate payers, and from 28% to 20% for higher rate payers. It would also reverse the Conservatives’ easing of inheritance tax, which will allow couples to pass on a home worth up to £1 million free from the levy by 2020, and restore the bank levy to its level before previous chancellor George Osborne’s cut to the tax. The married couples tax allowance would also be scrapped.

Trusts under scrutiny

Corporate tax reliefs would also come under scrutiny, with Labour claiming it will raise £3.8 billion through an ‘efficiency review’ into the ‘range and scope of business tax reliefs and tax-planning structures like trusts’.

Rachael Griffin, tax and financial planning expert at Old Mutual Wealth, said the proposals ‘threaten to rip up the rule book on legacy planning’ and that it risked penalising those who relied on them for legitimate reasons.

‘Trusts are a long-established mechanism for legitimate inheritance tax planning and they are an effective mechanism for maintaining control over your affairs in later life and when you eventually pass,’ she said.

‘For instance, it is common to place a life insurance policy in trust so that the family of a deceased parent can access funds immediately, without the strain and possible financial difficulty involved in the probate process.’

Labour is eyeing £6.5 billion from its plan to combat tax avoidance, which includes reinstating HM Revenue & Customs as a preferential creditor when firms go bust.

A further £5.6 billion would come from extending the application of stamp duty paid on share purchases, currently 0.5% on acquisitions over £1,000. Labour wants to extend this to derivatives, although banks and fund groups would pay a lower 0.2% charge, and bonds, apart from gilts. Market makers would also lose their current exemption to the charge.

Imposing VAT on private school fees will raise £1.6 billion, Labour claims, while the same amount will be raised by the ‘offshore company property levy’, which will impose a 15% charge on purchases of residential property by offshore trusts located in a ‘blacklist of tax havens that HMRC will develop’.

An ‘excessive pay levy’, charging companies 2.5% on any employee salaries above £330,000 and 5% above £500,000, will raise £1.3 billion.

Another £2.6 billion will come from a series of other measures, including:

  • levying higher rate, rather than standard rate, insurance premium tax on medical insurance, effectively a hike from 12% to 20%;
  • saving on discretionary housing payments by scrapping the bedroom tax;
  • redirecting spending from ‘sugar tax’ from capital to revenue;
  • reforming the controlled foreign companies corporation tax regime.

In apparent recognition that people and businesses would plan their affairs so as to minimise the impact of the higher taxes Labour has allowed for receiving £3.9 billion less than its calculations due to ‘additional behavioural change and uncertainty’.

Big spenders

These revenues will finance an extra £48.6 billion in spending a year should Labour gain power. More than half of this will be spent on education, with the scrapping of university tuition fees the single most expensive pledge, costing £11.2 billion.

‘Labour believes education should be free, and we will restore this principle,’ the manifesto reads. ‘No one should be put off educating themselves for lack of money or though fear of debt.’

Increased schools funding will cost £6.3 billion, while £5.3 billion will be spent on childcare and early years support.

Healthcare will receive £5 billion of funding, an additional £2.1 billion will be spent on social care and £600 million will be spent on restoring nurses’ bursaries.

Another big commitment, costing £4 billion, is the pledge to remove the public sector pay cap, which limits pay rises for staff in schools and hospitals to 1% a year.

Doubling paternity pay and leave would cost £300 million, as would the pledges to ‘unfreeze’ the state pensions of UK citizens living overseas, where they have not risen in line with those for UK residents, and extending means-tested pension credit to women born in the 1950s affected by the acceleration in the state pension age.

Its biggest welfare commitment will be the £4 billion cost of scrapping the bedroom tax, reversing bereavement support cuts and the £30-a-week cut to disability benefits, which would be extended to 165,000 more people, restoring housing benefit for under-21s and uprating the carer’s allowance to the same level as the jobseekers’ allowance.

Additional border guards, firefighters and HMRC tax collection staff, coupled with the abolition of employment tribunal fees, will cost £600 million, while another £300 million will be spent on 10,000 more police officers.

Funding for the devolved administrations in Northern Ireland, Scotland and Wales will rise by £6 billion a year, in line, Labour said, with assumptions from the 2015 spending review.

Would it work?

George Bull, senior tax partner at accountants RSM, questioned whether the economy could cope with the hike in taxation that Labour envisaged.

‘At the heart of the Labour Party manifesto is the gamble that the top 5% of British taxpayers and larger companies can and will pay an extra £48.6bn per year without undermining the economic health of the nation.

‘The Labour Party is hoping that, even though it plans to increase tax by around 7% of GDP, it can bring about economic growth, social justice and a better life for all. For these taxpayers, Tax Freedom Day will be postponed to October!’ he said in reference to the point in the year when an individual effectively stops paying tax to the government.

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Comments  (6)

  • samplewriter: 

    There is little hope for labour ever getting into power again since the snp took many of labours parlimentary seats .the snp would have to start losing seats which might happen they quite suddenly improved their position so an equally reverse action is not without posabilities .a few seats could change hands the snp leader looks a bit over prominent in her activities enough to cause a small wave.

    Labour yesterday came up with the thoughts of corbyn . yesterday in their little bit bigger red book mao would applaud the effort .my edition of the thoughts of mao sold for a pound on a car boot sale ,how anyone could rule a country from a red book could only happen in china .or could it .

    09:13 on 17 May 2017

  • Trevor Smith: 

    I find it tedious to read and hear about whether or not election manifesto pledges "add up" or how the expense of them can be/will be achieved

    I am sure many people can remember Osborne's pledges on reducing.eliminatiing national borrowing by 2015 when the fact that they were not kept(in fact exceeded ) are swept under the carpet by interviewers/chief correspondents/editors etc etc etc. Never to be mentioned again. Why spoil a "good" contemporary election story when new budgetary plans/commitments /tax measures are announced by this political party or another only to be abandoned and forgottened post election victory

    Events Dear Boy events!!

    C'est la Vie

    11:30 on 17 May 2017

  • Alan Tonks: 

    With Peter the Painter in charge nothing will add up, in any case what is a party manifesto apart from a load of lies.

    If I remember, didn’t at least two so-called high ranking members of the Labour shadow cabinet have problems with numbers.

    19:05 on 17 May 2017

  • Franco: 

    Labour will be faffing along taxing the middle class and losing elections, until they find the guts to make the top 1% pay 99% of the taxes, both direct and indirect.

    19:42 on 17 May 2017

  • Jon: 

    Trevor - this is a financial site, and therefore whether or not the plans add up is of interest to the majority of readers.

    Of course the extra borrowing required would also put up the interest cost which I have not seen mentioned, and that whilst interest rates are low at present, most economists expect them to rise in the medium term.

    Also Labour do not sem to understand that taking more from companies will make them less likely to invest in the UK, with the consequence of fewer jobs (hence less payroll taxes and all the tax which flows back on individuals spending) plus greater benefit costs for those not in work.

    And hitting companies will also reduce their capacity for dividends, so pension funds, savings funds, insurance companies and so on will be hit too. Thus "the hard working man" will have a lower pension and pay more for many services. With the fall in Sterling many large companies have been trying to buffer price rises, but their capacity to do so will be eroded.

    It all comes down to can the State run things more efficiently than the private sector. If not, then any increased taxation and nationalisation will damage our economy. and hence the "hard working man"

    19:59 on 17 May 2017

  • Independent Thought: 

    Just because there has been " no reference to...a shift to a more redistributive policy here," doesn't mean there won't be one. A manifesto is, in theory, a subset of what they would do. They could always surprise us all :-)

    05:42 on 19 May 2017

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