It seems not that long ago that politicians were accused of being all the same, battling to define and occupy the political centre ground with policies differentiated only in shades of grey. However, in this era of Brexit and President Trump, politics in Westminster now offers starker choices. This election involves very different plans on Brexit and the future of the Union, on climate change, and on the size and role of the state.
Ahead of a third General Election in five years next Thursday, we take a look below at the manifestos of the three largest parties standing nationwide (Conservatives, Labour and Liberal Democrats), focusing just on policies related to the financial planning and investment portfolios of our clients and prospective clients.
Boris Johnson’s flagship pledge in the Conservative leadership campaign to increase the higher rate tax threshold from £50,000 to £80,000 appears to have been abandoned, for now at least, and there are only two tax pledges of real consequence in the Conservative manifesto.
The first is to raise the tax-free national insurance threshold from £8,632 currently to £9,500 next tax year for employees (Class 1) and the self-employed (Class 4). This tax cut is accompanied by a more expensive, unfunded and time unspecified “aspiration” to further increase the threshold to £12,500 (the current level of the personal allowance for Income Tax). It is worth noting that the proposals do not extend to employers’ Class 1A contributions (which currently share the same £8,632 threshold).
The second is a freeze throughout the next Parliament of the rates of Income Tax, national insurance and VAT (the three taxes that raise over 70% of HMRC revenue). Benign on the face of it, this promise (if honoured) may hamper simplifying the tax system and balancing the books. A similar promise in their 2015 manifesto, abandoned in 2017, prevented addressing relatively minor differences in the taxation of employed and self-employed individuals. If the Conservatives seek to raise taxes by other means, this pledge may be a recipe for more fiscal drag (where tax allowances do not fully increase in line with inflation), so-called “stealth taxes” (such as further tinkering with pension allowances) and greater tax complexity in general.
Turning to the Labour manifesto, this clearly promises more changes. As in their last manifesto, the additional rate threshold above which 45% Income Tax is payable would be nearly halved from £150,000 currently to £80,000, with a new “super-rich rate” of 50% introduced for incomes above £125,000. That last figure is aligned with the top of the hidden tax bracket that exists between £100,000 and £125,000, where the marginal rate of Income Tax is currently 60% due to the tapering away of the personal allowance – this would increase to 67.5% under Labour.
Labour also now proposes taxing dividends and capital gains (in excess of a rate-of-return allowance based on 10-year government gilt yields) at ordinary Income Tax rates, with only the first £1,000 per year of each exempt. Higher dividend taxes would affect many self-employed individuals as well as many investors, and Entrepreneur’s Relief would also be scrapped (though the Conservatives may do the same, having pledged to “review and reform” the relief). Labour would abolish the (often unclaimed) Marriage Allowance (as would the Liberal Democrats), while at the other end of the scale those earning more than £1m a year would see their tax returns become publicly accessible.
Finally, while the Conservatives are silent on Inheritance Tax, the Labour manifesto restates previous pledges to abolish the complicated residence nil rate band (so everyone has only a nil rate band of £325,000) and end the tax advantages available to non-domiciled individuals claiming the remittance basis. This is despite speculation that their manifesto might propose the replacement of Inheritance Tax with a Lifetime Gift Tax, a proposal also absent from Liberal Democrat plans.
The Conservatives appear to be arguing that no one need pay more for maintaining or improving public services, and Labour that only the “wealthy” (and companies) need pay more. As the Institute for Fiscal Studies has pointed out, there must be serious doubt as to the long-term validity of both arguments in the context of an ageing society, increased international mobility, and a tax system that is already fairly progressive (the level of tax paid by workers on ordinary incomes is among the lowest in the developed world).
In that context, the Liberal Democrat manifesto argues that almost everyone needs to pay more for improved public services: they propose increasing each of the headline Income Tax rates by 1% (ring-fencing this for the NHS and social care), abolishing the annual Capital Gains Tax exemption of £12,000 (though they seem to stop short of taxing capital gains as ordinary income), and reforming air passenger duty to target frequent flyers (those taking more than two or three international return flights per year). It may not be a message the electorate is ready to hear.
Each of the parties’ manifestos includes policies that might squeeze the profits of companies (and therefore returns to investors), though to very different degrees. The Conservatives now plan on scrapping a long-promised reduction in the rate of corporation tax to 17% next year, instead holding the rate steady at 19%. They would also increase the National Living Wage from £8.21 per hour today to around £9.60 in today’s terms by 2024, and extend this from over 25s currently to over 21s instead. The Liberal Democrats would increase corporation tax to 20%, and introduce a new “dependent contractor” employment status to give more rights to many working in the gig economy. Arguably, companies might be able to take these changes in their stride.
By comparison, Labour intends on raising half of the additional taxes they propose from corporations. They would gradually increase corporation tax rates to 21% for smaller businesses and 26% for larger ones, and review a wide range of corporate tax reliefs. Labour would tax a share of multinationals’ global profits, rather than just their declared UK profits. Companies would pay an “excessive pay levy” of 2.5% on the pay of employees earning over £300,000, 5% over £500,000 and 7.5% over £1m. And larger firms would be forced to gradually transfer 10% of their shares (worth nearly £300 billion) into “inclusive ownership funds”, the dividends from which would go to employees (up to a cap of £500 per employee per year) and to the taxman (any excess over the cap).
Furthermore, rail, water and energy companies would be nationalised by Labour, as would BT Openreach and the Royal Mail. The National Living Wage would be raised immediately to at least
£10 per hour and extended to all over 16s, and the stamp duty payable on share trades would be extended to trades in corporate bonds and equity, debt, foreign exchange, interest rate and commodity derivatives.
The revenues that Labour’s measures might raise and so the extent to which these might impact investors, workers and the economy are highly uncertain. Translating promises into policy will require a clear majority in Parliament, overcoming numerous practical hurdles, and doubtless facing down fierce lobbying if not also legal challenge. In a globalised world, many companies may be able to take steps, at least in the long run, to restructure their businesses and avoid a higher tax burden. And, of course, before all that, a Labour majority government continues to look unlikely, with some betting markets now offering odds as long as 40/1 (and similar odds on potential Labour-led coalitions).
One thing that is clear is that government borrowing is likely to rise: even the Conservatives’ costings for their own plans (which assume “getting Brexit done” proves straight-forward) include an extra £20 billion per year of borrowing. And while many appear worried by the scale of Liberal Democrat and especially Labour plans to increase public borrowing, the Institute for Fiscal Studies projects that a no deal Brexit (a particular risk under Conservative plans) would be just as bad for the public finances. Whatever the trigger, with much higher borrowing, interest rates could rise (affecting the returns from fixed interest investments), and there might be fewer fiscal levers to pull to mitigate any economic slowdown or recession in the next Parliament.
There is little in any of the manifestos to bring (festive) cheer to most property owners. Instead, the Conservatives promise further increases to stamp duty: this time a 3% surcharge on foreign resident buyers of UK property, a proposal echoed within the Liberal Democrat manifesto (though the level of their surcharge is unspecified). Labour proposes an annual holiday home levy of up to 200% of the property’s council tax liability, while the Liberal Democrats pledge to give councils the right to raise council tax by up to 500% for second homes of any kind. All of the parties promise building more houses and enhancing tenants’ rights, though Labour’s promises go furthest (for example, private rents would not be allowed to rise faster than inflation).
On pensions, by far the biggest proposals relate to state pensions, in particular Labour’s £58 billion one-time offer to compensate nearly 3 million women in their sixties affected first by the equalisation of state pension ages for men and women, and then by accelerated rises in the state pension age. Payouts would be £100 for each week of delay, up to £31,300 each. Labour also proposes maintaining the state pension age at 66, a change of no lesser expense in the much longer term. Otherwise, all the major parties propose keeping the expensive state pension “triple lock” (the Liberal Democrats possibly only for pre-2016 state pensions, it is unclear) and other pensioner benefits.
State pensions aside, pensions are conspicuous by their near total absence from all three main parties’ manifestos. Among the few comments of any note, all three parties ambiguously pledge to “address”, “review” or “listen and act on” the problems caused by the tapered annual allowance for doctors – ignoring that this complicated stealth tax affects all high earners – and all would extend the benefits of auto-enrolment to more individuals in one way or another. ISAs get no mention at all.
We think it worth concluding by briefly commenting on three areas of spending in the manifestos that might directly affect the personal finances of clients: the costs of childcare, education and social care in later life.
On childcare, whereas Conservative plans appear limited to a token £1 billion of extra spending, the Liberal Democrats have by far the most ambitious plans. These include 35 hours per week (for 48 weeks of the year) of free childcare for all children aged 2-4 years, and for children aged 9-24 months as well where both parents work. Meanwhile, Labour pledges 30 hours per week (during term time) of free childcare for all children aged 2-4 years, while extending paid maternity leave to 12 months. While significant investment would be required to deliver on such plans, these could save some parents tens of thousands of pounds in the longer term, as well as facilitating parents going back to work sooner.
On education, it is worth noting that Labour pledges that private school fees would become subject to 20% VAT, though this may be at least partially offset for children who continue to university by their pledge to scrap tuition fees. The Conservatives plan to “consider” the Augar recommendations made earlier this year (and “look at” the interest rates on student loans), while the Liberal Democrats this time make no promises on tuition fees or student loans.
Finally, on social care, the Conservatives have largely steered well clear of the issue this time around (plans in 2017 that were branded a “dementia tax” are widely blamed for costing them a majority). The Conservatives pledge only a token £1 billion of extra spending (split between adults and children) and otherwise to seek a cross-party consensus, with a condition that no one should have to sell their home to pay for care (what this means in practice is unclear). The Liberal Democrats would also spend more and prioritise a cross-party consensus, to include an (unspecified) cap on costs. Only Labour lays out more specific plans, including free personal care for those over age 65, and a lifetime cap of £100,000 on any individual’s contribution to other costs (such as care home accommodation).
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