Law firm partners at major City firms are facing the prospect of a substantive hike in tax if the Labour Party forms a government in this month’s general election with current manifesto pledges expected to see many partners at LB100 firms with a five-figure increase in their annual tax bill.
Under Labour’s policy, the 45p rate of income tax will be raised to 50p for people earning over £150,000. According to numbers produced by Baker Tilly, this means that a partner earning £1m will pay £500,590 in income tax and national insurance – £42,060 more than the 2015/16 tax rate that currently stands at £458,530.
Under the Conservatives, the same higher-earning individual will actually pay slightly less tax at around £457,081 – a saving of almost £1,500 against the current tax rate and £43,508 cheaper than Labour’s plans.
One tax partner at a US firm said: ‘The Labour Party has taken a populist stance, but in a real sense is just clutching at straws with these tax regimes. Instead, the obvious loop-holes like tax avoidance should be addressed.’
With Labour’s policies, a partner earning £500,000 a year would be taxed around £17,060 more than under current rates, but pay around £1,500 less under the Conservatives. However, a senior associate that earns £100,000 will pay less tax under both parties, saving £440 under Labour and £1,597 under the Conservatives.
Another policy worrying many City partners is Labour’s planned introduction of a ‘mansion tax’ on properties over £2m. ‘A lot of us live in central London because we brought properties a long time ago,’ said one City partner. ‘It’s the older generation in particular that will be hit because once they have retired they will have this issue, which was not there before they bought the property.’
However, senior tax partner at Baker Tilly, George Bull, said that while the proposed income tax raise and mansion tax will make partners uncomfortable, it is not a new phenomenon and should not be their only concern. ‘The restriction of tax relief on pension contributions will have a far greater impact, especially because when lawyers are going through that middle phase of paying mortgages and school fees, a pension pot is not necessarily a priority,’ said Bull. ‘Lawyers will have to look into their post-retirement pot much earlier on.’
For more Legal Business analysis of the UK’s general election see: Fault lines – tax, Brexit and what the general election means to City lawyers