The new government has plenty of hope and ambition, but it faces very similar challenges to its predecessor.
Taxes and spending had both already risen under the Conservatives, which doesn't leave the new Labour government with many easy choices. They are even further boxed in by their election commitment not to raise any of the major taxes.
So what would you do and what could Labour do - to improve the prospects of the UK and its people?
First step is to understand where the money goes.
So here is a chart of which sources fill the the government coffers
Where Does The Money Come From ?
In 2023/24, UK government raised around £1,095 billion (£1.1 trillion) in receipts – income from taxes and other sources. This is equivalent to around 40% of the size of the UK economy, as measured by GDP, which is the highest level since the early 1980s.
Here is a chart of where the government gets its money from.
Graphic: @adamshawbiz
Notes: Capital taxes include stamp duties, capital gains tax and inheritance tax. Corporation tax here includes £4 billion from the energy profits levy (EPL).
It's really striking that the 'other' category is so massive - in fact the 2nd largest source of revenue for the government, raising 20% of all tax revenues. So while the new Labour government has pledged not to raise the big 4: income tax, corporation tax, national insurance or VAT, this might imply there is something significant with lots of small changes in other less obvious taxes.
Other taxes could include Stamp Duty, Electricity Generator Levy, Landfill Tax, Air Passenger Duty, Inheritance Tax, soft drinks levy, emmission trading auction receipts, custom duties and many more. The tax on soft drinks generated over £336 million between May 2023/2024 and customs duties generated £5billion over the same period.Look after the pennies and the pounds will look after themselves, as they say.
Where The Chancellor Spends The Money
Here is a chart of what the government spends its money on most.
Graphic: @adamshawbiz
The funding and efficiency of the NHS was the biggest electoral financial issue and The , the new Health Secretary, Wes Streeting, declared that the 'NHS is broken' - making the statement just an hour after being appointed.
But it is hard to argue that the faults within the NHS are a purely financial one, as the Conservative government boosted funding to the NHS taising budgets more than the rate of inflation. Although the big boosts were in response to COVID, even without the pandemic, funding of the NHS has been steadily rising.
This chart from research by TheKing'sFund shows that while spending was expected to come down in 2023/24 and 2024/25, up until then - the NHS budget has been steadily increasing in real terms.
So while more money might be required, it may not solve the problem of lenghtening waiting lists and growing disastification with the service patients and families are receiving. A bigger analysis will be required of what is going wrong and whether more money is the answer.
Room For Change
So where and what could the Chancellor change?
Capital Gains Tax: Though Labour has ruled out increasing most of the main taxes, it could still increase others, such as capital gains tax, which is perhaps the most likely to change.
Gains on investments held outside pensions and ISAs are currently taxed at
up to 24%, which is much lower than the rate that can be paid on earned income - which can be as high as 45%. You'll only need to pay these rates on the gains that exceed your capital gains allowance.
If you make a gain after selling a property, you'll pay 18% capital gains tax (CGT) as a basic-rate taxpayer, or 24% if you pay a higher rate of tax. Gains from selling other assets are charged at 10% for basic-rate taxpayers, and 20% for higher-rate taxpayers.
So the ethical argument would be that why is tax charged on investments lower than the tax charged on going out to work?
To avoid paying a higher rate of CGT, there have been reports that some people are selling assets now to crystallise gains which are taxed at 20% in the hope this will protect them from higher rates of tax on any gains in future.
You used to be able to run a scheme called 'bed and breakfast' in which you sold the asset one day - to take advantage of your CGT allowance and bought it back the next day. You can't do that anymore - but some are trying similar scheme.
The CGT allowance is the amount you can earn in profits before paying tax. It was £12,300 in 2021/20222, it was cut to £6,000 from April 2023 and to £3,000 from April 20243.
Pension Tax-Free Lump Sum : The maximum tax-free lump sum most people can take is capped at £268,275, equivalent to 25% of the historic pensions lifetime allowance (LTA). There was some talk that the tax-free lump sum might be messed around with, although this seems to have been dismissed - but who knows, it is still conceivable that this might change.
Pension Relief: The Chancellor Rachel Reeves seemed previously keen on a flat rate of pensions tax relief.
Tax relief is currently paid on your pension contributions at the highest rate of income tax you pay. So:
Basic-rate taxpayers get 20% pension tax relief
Higher-rate taxpayers can claim 40% pension tax relief
Additional-rate taxpayers can claim 45% pension tax relief
In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly alternative way.
It is conceivable that the government changes that so maybe abolishing the 45% aditional taxpayers relief. That's why some people have been putting in pension contributions now, to take advantage of the relief now, in case it is reduced in the future.
Pension Contributions: At the moment, you can put up to £60,000 into a pension from earned income. There was some talk that this might be reduced to £40,000 - again encouraging some to make what contributions they can, as soon as possible.
Inheritance Tax Changes: It would fit with Labour's political views to make inter-generational wealth transfers, much harder in order to increase social mobility and make it less easy for people to be rich, just because their parents were.
In particular they could make it less advantageous to inherit a pension or could remove business property relief on certain Aim-listed shares when held for more than two years. The IFS calculates that removing these reliefs could raise nearly £3bn a year.
It might also be possible to alter the IHT threshold. At the moment everyone has a tax-free inheritance tax allowance of £325,000. The inheritance tax rate is 40% of anything above that threshold.
VAT On School Fees: There is very likely to be VAT on private school fees. There ewas talk that this might raise £7.5bn across the course of this parliament. One way people are trying to avoid paying this is to pre-pay the fees now, as an advance payment. Although this might be seen as a legitimate scheme and could cause problems in the future.
Council Tax: Updating out-of-date council-tax valuations would be an obvious thing to do and would work like a wealth tax without making such a big political thing out of it.
Stealth Taxes: Income-tax and national-insurance thresholds are frozen until 2028, quietly pulling more people into higher tax bands as wages rise. Labour could well extend that freeze.
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