Labour’s New Era: Huge Impact on Your Finances

With Labour being voted in as the UK’s new government, we take a look at how Labour’s policies will impact your wallet. We review Labours current plans and consider the impact on your personal finances.

The UK is in somewhat of a financial mess. At the end of 2023, government debt hit £2,720.8 billion. That’s the equivalent of 101% of Gross Domestic Product, the financial value of goods and services produced in a country.

Taxation is at all time highs, the population is ageing and the NHS is struggling.

Any government would struggle in these times. Simply, a lot more money is required to go into the public purse which means paying more tax.

Every major party has published a manifesto for the election. These are proposals for what they would want to achieve. Every policy requires funding to implement, however the overarching question is where is the money coming from?

Labour have stated there will be no rises income tax, national insurance or VAT. This is all welcome news.

This however is a somewhat misleading statement. Whilst there will not be any increases in these taxes, there will be fiscal drag. As people’s incomes increase to hopefully match or exceed inflation, the tax bands will not move. As a result, more people will end up paying more in taxes, even if the rates and bands stay where they are today.

Labour has stated plans to ‘simplify ISAs’. Honestly we’re not too sure what that means beyond perhaps getting rid of the Innovative Finance ISA, IFA. We briefly discussed this as part of our look at ISAs rules for 2024. It’s not widely used and hence it may just get scrapped.

ISA Limits

We’ve all heard about ISA millionaires. Whilst they haven’t explicitly mentioned it, there has been talk of Labour introducing a £100,000 overall ISA limit. Obviously this won’t impact that many people, but would be a kick in the teeth for those that been diligently saving.

Capital Gains Tax

Labour has not ruled out changes to Capital Gains Tax (CGT). Today everyone is eligible for £3,000 of tax free capital gains allowance. This tax free allowance has been cut significantly over the last couple of years, down from £12,300.

There is potential for Labour to reduce this allowance, or indeed increase that tax rate incurred for any CGT above this threshold.

CGT is a bit of a loophole at the moment. Tax payers pay 40% on income above £50,271 but only 20% on gains from shares.

The knock on impact of this is investors may want to tread cautiously when bulk selling investments that have grown in value. As always, the recommendation is to use your ISA allowance first.

British ISA

Perhaps at odds with their statement to simply ISAs, Labour seem keen to encourage investing in the UK. They are backing an approach for the new British ISA currently in open review.

Whilst a little surprising Labour would back a Conservative idea given it was only announced this year, we expect Labour will have ample opportunity to shape this as they decide.

Pensions are likely where the majority of the public will feel changes the most, whether they are they are conscious to the changes or whether they happen ‘behind the scenes’ in the details of many workplace pensions.

Triple Lock

Labour has pledged to maintain the triple lock on the state pension. This means the state pension increases by the highest out of average earnings, inflation or 2.5% every year. Whilst this should provider certainty for pensioners, this is extremely expensive, and made worse with an ageing population.

Lifetime Allowance

The lifetime allowance – a cap on overall pension value – was abolished at the start of this tax year by the Conversatives.

This allowance capped the tax benefits of your pension when you went over a pension lifetime value £1,073,100. The impact of this was additional tax on lump sum withdrawals and a 25% tax in addition to income tax on any standard withdrawals defined to be above the threshold.

The real world impact of this was high paid key workers such as judges and doctors retired early to avoid the cap! Not ideal.

Labour have not explicitly mentioned reintroducing the lifetime allowance as part of their manifesto. This feels like a conscious choice as early in the year it was something they were proposing challenging and reintroducing.

Lump Sum Limit

Labour may well reduce the limit on the amount people can take tax free from their pensions. This currently stands at £268,275. A reduction would mean more of people’s pensions counting as income and thus being taxed as such.

The most obvious impact here is that people may not be able to rely on the tax free lump sum to pay off the of the remainder of their mortgage.

UK Focus

Labour have stated their intentions to encourage investing in the UK. This is likely to come with encouragement, incentives or regulations about where the majority of pension funds can and should be invested.

Most workplace pensions in the UK are by default in relatively broad investments. Labour could well place restrictions on these, either by default or with further regulation. Their intent would be to encourage pension fund investments to be more focussed on investing in the UK.

FTSE 100 vs S&P 500 On a £10,000 portfolio

Whilst this sounds very patriotic, you only need to compare the rate of growth of the S&P 500 vs the FTSE 100 since 2000 to see how this could really hamper growth for UK pensions. We’ll have to see how this works out in practice.

Whilst Labour have made some reasonably concrete statements about their plans, at this point in time much is left uncertain. In part, this is because Labour haven’t had time since the election was announced to get fully briefed on the current sate of play.

World events will have a significant impact on Labour’s decisions over the next few years. Legacy impact from the Conservative government will also impact financial policy. Inflation is seemingly coming down, and Labour will be keen to continue work to ensure the 2% inflation target is met.

Ultimately much is left to be decided, so you should not make any big financial decisions until policies are confirmed. Remember after all that a party manifesto is simply an outline of what a party wishes to archive, it’s not an obligation.