A new Labour government

The new Chancellor, Rachel Reeves gave her first speech last Monday and stated that she has requested the Treasury to provide an assessment of the state of spending that they have inherited from the last government and to present this to parliament before the summer recess (by the end of July).

This may pave the way for an assessment that they did not know how bad things were until they were able to check the finances. The next step from there could be a first Budget with large tax increases, justified by the ‘poor’ financial position.

The date for the next budget later this year will also be announced before Parliament breaks up which will be welcome. While it is possible the budget could be in September, they may delay this until October or even November. The earliest date is Wednesday 18 September to give enough time for the Office of Budget Responsibility (OBR) to produce an Economic and Financial outlook.

The State Opening of Parliament and the King’s Speech will be on Wednesday 17 July and this will be an important indicator of the new government’s legislative priorities.

Labour has been keen to dispel the traditional thought that taxes will go up under their tenure although it does seem to us that this revolves around ‘working’ taxes whatever that may mean. Sir Kier Starmer reiterated in the manifesto launch that there are ‘no plans’ to raise Income Tax, National Insurance and VAT however this is caveated by a reference to working people. They have also stated that they will cap the level of Corporation Tax at 25% over their term in office.

As with the previous government however, any changes could possibly be with the areas they have not mentioned. There has already been the announcement that Labour will add VAT onto Private School fees and target those that are not domiciled in the UK and private equity fund managers. Aside from the main taxes, there has been little mention of other taxes.

Labour has ruled out introducing CGT on the disposal of a primary residence, but we could see increases in the CGT tax rate or allowances reduced further.

Under the Conservatives, the CGT annual allowance fell from £12,300 in 2022 to £6,000 last April and £3,000 from April this year.

As a result of the reduction in the annual allowance, we think it will be more common to pay CGT in the future. While paying any tax can be galling, this may be one of the more palatable taxes given it is only payable on capital gain and the rates are half that of income taxes: 10% for basic rate taxpayers and 20% for higher rate taxpayers. So, a combination of the reduced allowance and potentially an increase in rates, there has been talk of an alignment between CGT and Income Tax rates so an increase to 20% for a basic rate taxpayer and 40% for higher rate taxpayers.

As part of the annual management of the Old Mill portfolios (excluding Individual Savings Accounts (ISAs) and Pension wrappers) we rebalance them every year back to client’s original risk profile. Whilst this may result in the need to pay some CGT on any gains, if we do not do this the resulting differences in investment performance could easily outweigh any tax saving.

There was also no reference to IHT in the Labour manifesto other than in relation to offshore trusts, but it has been widely reported they are drawing up options that include significant changes to IHT but all we can do is wait and see.

Increases in tax paid do not have to come from tax rises. We have written before about the freezing of allowances, like the income tax personal allowance or the basic and higher rate tax thresholds causing a ‘stealth’ increase in the tax we all pay. Labour has stated that they will maintain the freeze on the Income Tax free allowance.

From the manifesto, it is difficult to know for sure the impact on you individually. We have set out several areas below, largely around pensions where action may be worth considering ahead of a first Labour budget.

Since the abolition of the Pension Lifetime Allowance (LTA) was announced at the beginning of 2023, Labour have been vocal on their plans to reintroduce it if they get into power. They have now said this is no longer their intention.

If you expect that your pension fund is likely to remain below the LTA, which was £1,073,100 before the changes, the current rules haven’t changed materially in terms of the tax-free cash you can receive so there is no need for any action to be taken.

Those with larger pension funds that are approaching or over the LTA should still consider their longer-term plans and how they may be affected by the potential change to pension rules. Although the LTA is not expected to be reintroduced, there could still be changes to limits, especially the tax-free limits – either the maximum tax-free lump sum when you draw upon your pension, or the tax-free limits when you die.

Possible actions

Any advice we provide will need to reflect individual circumstances, however, some of the broad steps you can consider taking are below:

• If you were thinking of taking your lump sum soon anyway then taking it before the first Labour Budget would avoid any potential changes. It is unlikely that the current 25% tax free allowance will increase.
• Retaining money in pension funds is currently attractive for Inheritance Tax purposes. Although there is also the possibility of reform here as well, we believe it is sensible not to take a pre-emptive action as this will likely result in significant Income Tax liabilities and the value of the pension fund being placed back into the taxable estate. The best course of action will be to await any changes affecting the Inheritance Tax treatment of pension funds and then plan accordingly.
• There are some other technical options for those who have taken tax free cash in the past. We have written about this in a separate article last month which you can read here.

Rachel Reeves has been a long-time supporter of a flat rate of tax relief on pension contributions rather than the marginal rate tax relief currently in place. This means that anyone making pension contributions would get the same rate of relief – possibly 30%, rather than higher and additional rate taxpayers getting a higher rate of relief.

There have been assurances that Labour wasn’t planning to change this either. Given tax relief is unlikely to be more generous under any new rules, if you are planning on making additional pension contributions later this year, it would be worth considering bringing any contributions forward.

Labour may also reduce the amount you can currently pay into a pension which is currently set at a maximum of £60,000 a year. There is also currently the ability to carry forward unused pensions allowances from previous years which could potentially permit contributions to be paid of up to £200,000 and receive full tax relief. They may seek to change/reduce this so again bringing forward plans to take advantage of the current reliefs may be worthwhile.

Labour has been very careful to reassure people that there will not be a ‘tax shock’ if they are elected. If you are approaching retirement or wish to draw upon your pension in the near future, it may be beneficial to bring this forward while we know the rules. It is certainly wise to ensure you are maximising the allowances you have ahead of an Autumn Budget, whether it be using the maximum current Individual Savings Allowance (ISA) allowances or gifting to your family.

While it is not certain that Capital Gains Tax will change, if you have large capital gains in assets and are able to crystalise these at a 10% rate of tax, then this may be worth considering as it is unlikely this rate of tax will be lower in any future changes.

Do speak to your Old Mill Financial Planner if you want to discuss your personal circumstances. Get in touch.