Labour Abandons ManifestoBreaking Income Tax Rise as Exit Tax Plans Dropped

Labour has decisively withdrawn proposals for a significant rise in income tax that would have breached its manifesto commitments. The change of direction was submitted to the Office for Budget Responsibility ahead of the November Budget, with the Treasury now considering alternative measures to adjust the income tax regime.

Among the adjustments being assessed are the lowering of income thresholds at which different tax bands begin to apply, alongside extending the freeze on income tax thresholds originally introduced by the Conservatives. This approach is expected to form part of a wider package of smaller tax measures crafted to address fiscal challenges in the upcoming Budget.

Chancellor Rachel Reeves has also formally abandoned plans for an exit tax targeting wealthy individuals seeking to move their assets overseas. The measure, initially anticipated to raise approximately £2 billion, was discarded due to widespread industry concern regarding a potential exodus of business leaders and entrepreneurs. Experts warned that such a policy would diminish the United Kingdom’s attractiveness to high net worth individuals, who are increasingly mobile in a competitive global landscape.

Current regulations allow emigrants to dispose of UK assets without triggering capital gains tax, which for residents ranges from 18 to 24 per cent. The proposed exit tax would have imposed the standard capital gains tax rate on those departing the country, bringing the UK in line with several European jurisdictions such as Germany, Norway, and Belgium, which have implemented comparable policies in recent years. However, business leaders argued that such a charge would stifle innovation and deter investment.

Analysis from advisory firm Henley and Partners indicates a surge in high net worth individuals leaving the UK, with an estimated net outflow of 16,500 millionaires projected for 2025, a notable increase from the 10,800 who left in the previous year. Popular destinations include the UAE and Switzerland, as revealed by new migration data. The threat of an exit tax provoked additional alarm after prominent figures, including Britain’s richest self-made entrepreneur under 40, Herman Narula of Improbable, signalled intentions to relocate operations in response to the policy discussions.

The decision to abandon the exit tax has created dissatisfaction among some Labour MPs, particularly those aligned with the party’s left wing, who have advocated for increased wealth taxation. Critics argue that the revised approach favours wealth protection over worker taxation, raising questions about the government’s commitment to broader fiscal fairness.