Labour’s four key pledges

In their June manifesto, Labour laid out their four key pledges. These were: to uphold the state pension triple lock, to tackle tax avoidance, to remove VAT exemption from private school fees, and finally, no increases to income tax, National Insurance, VAT, or the headline rate of corporation tax.

While the manifesto made for good headlines there was a lack of detailed information around these measures which has led to some conjecture as the nation awaits further clarity.

According to Martin Young, Managing Director, abrdn ‘the inaugural budget of the newly elected Labour government will be crucial, as it will outline the party’s stance on personal finances for the next five years and will potentially confirm manifesto promises related to taxes, benefits, and allowances. These decisions will significantly impact the economic landscape for individuals and families.’ And importantly, he reminds us that manifesto promises aren’t set in stone:

‘A party’s manifesto is merely a glimpse into its governing vision. However, the realisation of these policies depends on several factors, including the governing majority’s size, economic fluctuations, and geopolitical events. Only time will reveal if these policies will see the light of day.'

The new government’s first fiscal event could be the 2024 Autumn Statement in November. A first Budget could be announced sooner – as early as 13 September – but it’s more likely to be later given the Office for Budget Responsibility (OBR) needs 10 weeks to produce a report.

The tax changes we know about

Tackling tax avoidance and loopholes

‘Non-doms’ refers to UK residents who have their permanent home or ‘domicile’ outside the UK and have not had to pay UK tax on foreign income.

The Labour government has decided to remove the non-dom tax status and to invest in reducing tax avoidance – this expected to raise £5.2 billion which will be used on public services. A further £565 million is expected to be freed up by closing the ‘carried interest loophole’. This is where Private equity executives receive income from basic pay, bonuses, and carried interest (share of profits). Carried interest is currently taxed at a lower capital gains rate (28%) rather than the higher income tax rate (Scotland 48%, rest of the UK 45%). However, Labour aims to reclassify carried interest as income, subjecting it to the higher income tax rates.

State pension triple lock

The party has confirmed it will keep the triple lock which guarantees the state pension rises every year by whatever is highest – inflation, average wage increase or 2.5%. But it won’t match the Conservatives’ ‘triple lock-plus’ promise which would have raised the personal income tax allowance too, meaning that no one would have paid income tax on the state pension as it increases.

This means that the state pension (currently £11,502) will eventually exceed the personal income tax allowance. This is currently frozen at £12,570 until 2028 and Labour has confirmed they’ll keep this freeze in place. As a result, the gap between the state pension and the personal allowance – or to put it simply, the amount you can earn before paying tax – is narrowing significantly.

Given that the personal allowance is set to remain at £12,570 until 2028-29, even a few years of moderate increases will see the state pension tip into tax-paying territory. This could mean that pensioners will pay tax on all income they receive outside certain tax wrappers such as an ISA, any interest above the £1,000 personal savings allowance and any dividends above the £500 dividend allowance.

VAT on private school fees

According to Labour’s manifesto, by applying VAT and business rates to private schools, the new government expects to raise £1.6 billion. The additional rates are likely to be passed on to the fee paying families as in most cases the schools won’t be able to absorb the costs.

This will affect families with children already attending a private school or those planning to enrol – but new Chancellor Rachel Reeves has confirmed that this policy won’t be introduced until 2025. For those affected by these changes, there are actions you can take to help cover the costs. For example, you could widen the discussion on who will help pay. It’s common for aunts, uncles, and grandparents to assist with paying school fees along with other family members – and this can help mitigate their own future inheritance tax liability. You could also set up a trust for the child where you, or other family members, ‘gift’ the money to the child, but you’ll still have full control over the assets and where they’re invested until the child is aged 18. With effective planning it may still be possible to budget for these increases.

Relief for businesses

Labour outlined several plans to reform the business rates system to help breathe life back into the UK High Street. They’ve not specified what will replace the current business rates system but the changes will likely support small businesses and help level the playing field against online competitors.

Potential changes to taxation

The Labour manifesto was quiet in many areas of taxation, leading to speculation that changes could be afoot for pensions, capital gains tax (CGT) and inheritance tax (IHT). Let’s take a closer look:

Capital gains tax

It’s no secret that many Labour party members approve of raising capital gains tax. Some have even stated that they would like to see it aligned with income tax rates. So this is one to keep an eye on as the government progresses.

Inheritance tax

There are already a wide range of IHT exemptions in place and in the past, Labour has made it clear they’re of the opinion that some of the exemptions and allowances are too generous. So it’s certainly possible that there could be IHT changes on the horizon.

Pension tax relief

The Conservatives pledged they wouldn’t bring in any new taxes on pensions or increase existing ones. Labour, on the other hand, made no official statement on the topic leaving many savers wondering when or if they’ll reduce pension tax relief. However, they have confirmed they plan a full review of the pensions framework so it would make sense for them to do this first before making any changes.

And while Labour’s manifesto did promise to make changes to workplace pensions to further benefit savers and pensioners – we don’t yet know what these changes would look like.

Stay the course and make use of your tax free allowances

Although we don’t have all the details yet, this doesn’t mean you should wait until the new government makes an announcement to organise your finances and pension savings. So make use of your tax free allowances – fund your ISA if you haven't already, consider your pension contributions and where possible use them to shelter more of your money.

Regardless of what might or might not happen, making the most of tax efficient ISA and pension wrappers, which shield any interest, dividends, or capital gains earned from income and capital gains tax, remains a good strategy. This means your investments can grow without being eroded by taxes.

Keep a close eye on your investments

Although market reaction to the UK election has been muted, any important event, wherever it happens in the world, can have an effect on financial markets – this will likely be the case in November with the US Presidential election. So it’s important to monitor your investments regularly.

While you can’t control how markets perform, you can control where you’re invested. Periods of market volatility are a valuable reminder of the importance of diversifying – or spreading your money across different types of industries and geographical locations.

If you’re only investing in one or two of these then you’re exposing yourself to quite a degree of risk. But diversifying across industries and countries can help you reduce the amount of risk you take and potentially get more consistent returns, with fewer ups and downs.

If you don’t have the knowledge or time to review your investments, then think about options which are managed and overseen by experts.

There's support if you need it

If you’re not sure how tax changes could affect your finances, or are concerned about the impact of the election, consider speaking to a financial adviser. Paying too much tax is an easy trap to fall into but a financial adviser can help manage your finances in the most tax-efficient way possible.

If you’re already an abrdn client, get in touch with your financial planner. If you don’t have an adviser, you can find out more about how our financial planning services can help you.

Remember though that tax and legislation may change, and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.

The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Information is based on abrdn’s understanding in July 2024.