The Labour Government’s proposed plan to abolish non-dom tax status could lead to a significant financial shortfall for the UK, potentially costing the economy £6.5 billion by 2035, and resulting in the loss of around 23,000 jobs by 2030.
These alarming figures come from a new study by the Adam Smith Institute (ASI), a leading economic think tank, which has assessed the potential impact of this move on the nation’s finances and employment.
The research focused on the expected departure of around 5,800 of the UK’s 21,100 remittance-basis non-doms—wealthy individuals who pay tax only on their UK earnings. ASI warns that the abolition of non-dom status, coupled with increased taxes on high-net-worth individuals (HNWIs) and the country’s lacklustre economic outlook, could drive many of these wealth-creators abroad, further damaging the UK economy.
This would result in lower investment, reduced consumption, and a sharp decline in tax revenues, contributing to significant job losses. ASI’s projections show that the economic ripple effect would cause the UK to lose £600 million annually by 2030, with a cumulative financial hit of £6.52 billion by 2035.
Moreover, the potential exodus of HNWIs could lead to a 26% drop in non-dom residents, based on comparisons with similar measures introduced in Denmark.
Call for Alternative Solutions
Given the crucial role non-doms play in the UK economy, ASI advocates for an alternative approach to reforming the system, suggesting an Italian-style flat fee of £150,000 per year for wealthy residents who are not domiciled in the UK. Such a scheme, they argue, could raise £12.45 billion annually, helping to secure the UK’s position as an attractive destination for high-net-worth individuals.
Former Chancellor Nadhim Zahawi has urged the current Government to carefully consider the potential fallout of abolishing the non-dom tax status, warning that the move would “repel investors, strangle growth, and hit the Treasury’s coffers.” He supports the introduction of the ASI’s flat-fee proposal as a viable alternative that would boost investment while keeping wealth-creators in the country.
Zahawi stated, “The Chancellor should heed these warnings. The proposed Italian-style system would encourage wealth creators to remain in the UK, providing much-needed stability and continued contributions to the economy.”
Competing with European Rivals
The report highlights that the UK is losing its competitive edge compared to European nations like Switzerland, Spain, and Italy, which have more favourable tax regimes for wealthy individuals. Andrew Amoils, an expert from New World Wealth, pointed out that wealthy individuals are increasingly questioning the value they receive for their taxes, particularly as public services continue to falter.
“With the VAT exemption on private schools now scrapped and wealthy Brits increasingly turning to private healthcare due to the deteriorating NHS, many UK millionaires don’t feel they’re getting much value for their tax contributions,” Amoils said. He warned that this would likely lead to an exodus of non-doms to more tax-friendly countries.
As the UK grapples with broader economic challenges, such as declining productivity and a skills shortage, the removal of non-dom status could exacerbate these problems by pushing wealth-creators and investors out of the country. The ASI report underscores the urgent need for a balanced approach that supports economic growth while maintaining the UK’s attractiveness to HNWIs.
The Government is expected to make its final decision on the future of non-dom status in the upcoming Budget, and all eyes are on Chancellor Rachel Reeves as she considers the long-term economic implications of the move.
In conclusion, the Adam Smith Institute report warns that abolishing non-dom status would be a costly mistake. A more thoughtful approach, such as the flat-fee model, could preserve the UK’s economic stability and ensure it remains a global hub for wealth and investment.
Source: Adam Smith Institute
