With the new government’s first Budget just a day away, the public awaits details of Labour’s approach to taxes, benefits and public spending. So far, Prime Minister Keir Starmer’s administration has revealed little, fuelling speculation around possible tax changes.

Labour’s promise to support “working people” by ruling out increases in income tax, VAT and national insurance rates has brought some reassurance; however, other taxes, such as capital gains and inheritance tax, could be in for a shake-up.

Income tax and “working people”

While income tax rates will not rise, indirect changes may still exist. Reports suggest that Labour may extend the freeze on income tax thresholds, introduced by former Chancellor Rishi Sunak in 2021, until 2030. If implemented, this extended freeze could see families pay an additional £16,500 over time as more taxpayers fall into higher tax brackets. Labour has strictly defined “working people”, excluding landlords and shareholders, potentially paving the way for tax increases on investment income rather than earned wages.

Capital gains tax changes

Capital gains tax appears to be one area under serious consideration for reform. Labour has ruled out taxing gains on an individual’s primary residence, but higher-rate taxpayers may see the rate for capital gains on second homes held at 24%. Gains on assets such as shares, currently taxed at 20% for higher-rate payers and 10% for basic-rate taxpayers, could face a rise by “several percentage points”. Additionally, Labour might reduce the current £3,000 capital gains tax threshold, significantly lower than the £12,300 allowance put in place as recently as 2022.

Inheritance tax adjustments

Labour has also indicated a potential overhaul of inheritance tax. The government may lower the threshold or tax-free allowances, currently allowing couples to pass on up to £1m if their property is left to direct descendants. Changes could also target exemptions that permit agricultural or business properties to pass tax-free, particularly affecting wealthy estates. Removing spousal exemptions, which currently allow assets to be transferred tax-free between married partners, could increase the inheritance tax burden on surviving spouses.

Pension reforms

Labour has not ruled out changes to the 25% tax-free pension lump sum, which could be cut from £268,275 to £100,000. Additionally, there are discussions around including pensions in inheritance tax, where pensions left to beneficiaries are currently exempt from inheritance tax liabilities. These proposals have prompted concern that pension tax reliefs and allowances could also be reviewed, impacting retirement savings.

National insurance and employer contributions

While Labour has promised not to raise national insurance contributions for “working people”, there is speculation around a potential increase in employer national insurance, which currently stands at 13.8%. A one-percentage-point increase could generate an additional £8.5bn annually but may indirectly affect employee benefits and job perks if employers cut costs.

Property and stamp duty

Homebuyers may see a return to pre-Truss stamp-duty thresholds, increasing costs for first-time buyers. Labour could remove the stamp-duty exemption currently enjoyed on the first £425,000 of a first home purchase, reducing the benefit to a maximum value of £300,000. Home movers may also see increases on properties valued between £125,000 and £250,000, while second-home buyers and buy-to-let investors could be hit with additional surcharges.

Savings and ISA limits

Another possible change could impact the personal savings allowance and ISA contributions. Labour is reportedly considering a cap on ISA savings at £100,000, with yearly contributions currently capped at £20,000. This move aims to curb benefits for high-income savers, with reports indicating that taxes on savings could raise £10.3bn in 2024/25 alone.

Council tax reforms

Labour may reform council tax by shifting to a property value-based proportional tax. A flat rate – potentially around 0.5% of property value – could replace the current banding system, which bases tax on outdated property values. This proposal aims to introduce a fairer, modern approach to council taxation.

Environmental and consumer taxes

Labour has suggested potential increases in alcohol, tobacco and fuel duties. Alcohol duty may rise in line with the Retail Price Index (RPI), while fuel duty, currently frozen since 2011, could see a return of the 5p per litre cut. Labour could also consider increasing duties on items like sugary foods and gambling, aligning with health policies to reduce long-term NHS burdens.

Labour’s Budget may also extend support for working families, including expanded childcare provisions, free breakfast clubs in primary schools and increased public-sector wages by an average of 5.5%. Plans to enhance worker rights include banning zero-hour contracts and mandating parental leave from day one.

Talk to us about how these potential changes may affect you.