What a Labour Government might mean for your wealth

The shadow chancellor Rachel Reeves was asked in May by a Guardian reporter whether there would be an emergency Budget before the summer recess were Labour to win the election. Her reply was that there would be no Budget without a full Office for Budget Responsibility (OBR) report, which in theory requires her to give ten weeks’ notice. Learning the lessons of the Truss / Kwarteng mini budget where uncosted tax cuts caused turmoil in the market for Government gilts, Reeves’ response was that any Government making significant and permanent tax and spending changes will be subject to an independent forecast from the OBR.

Work forwards from a 4 July election and that suggests no Budget before 18 September, (assuming that Wednesday will remain the chosen Budget Day). Labour has also said it would hold the Budget in the final two weeks of every November (at least four months before the new tax year) and a restated forecast – a spring statement – in the first two weeks of March.

While the manifesto has only just been published, the content has been consistent in the run up to the election and there were no new policies announced.

Labour have been keen to dispel the traditional thought that taxes will go up under their Government although it does seem to us that these revolve around ‘working’ taxes. Sir Kier Starmer reiterated in the Manifesto launch that there are ‘no plans’ to raise Income Tax, National Insurance and VAT. They have also stated that they will cap the level of Corporation Tax at 25% over their term in office. But there has been less mention of some of the taxes that can apply to you – dividend, inheritance and capital gains taxes.

As with the current Government however, the impact 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 such as Capital Gains Tax.

As we know from the incumbent Government, 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 have stated that they will maintain the freeze on the Income Tax free allowance, as have the Conservatives, although their Triple Lock plus promise would see the allowance rise for pensioners so their state pension will not be taxed.

In the manifesto the following areas have been listed with the estimated additional revenue included.

• Applying VAT and business rates to Private Schools is expected to raise £1.5 billion. Closing non-resident tax loopholes and reducing tax avoidance is expected to raise over £5 billion.
• Labour has long been vocal in its plan to abolish the carried interest ‘loophole’ which means that private equity fund managers are taxed on the receipt of some of their income ‘carried interest’ as capital attracting a 28% tax rate rather than as income and therefore taxed at a rate of 45% for those paying additional rate tax. This is estimated to raise £500 million.
• The other major fund raise is from a time limited windfall tax on oil and gas companies expected to raise £1.2 billion.

From the manifesto, it is difficult to know for sure the impact on you individually. The following paragraphs detail some areas which may be worth considering ahead of a possible first Labour budget.

Since the abolishment 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 pension commencement lump sum (PCLS) or tax-free cash you can receive so there is no need for any action to be taken.

Those with larger pension funds however 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.
• Retaining money in pension funds is currently attractive for Inheritance Tax purposes. Although there is also the possibility of reform here as well, it is likely to be 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 before taking any action.
• There are some other technical options for those who have taken lower PCLS / tax free cash in the past. We have written about this in a separate article which you can read here.

Another key difference between the current Conservative policy and Labour are the rules surrounding tax relief on pensions. 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.

With a commanding lead in the polls, Labour has been very careful to reassure people that there will not be a ‘tax shock’ if they are elected. Whichever Government is in power, there is a need to balance the books and it is only at the next Budget we will find out the detail and therefore the impact on you. 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.