Potential Financial Planning Implications of the UK Election
04 December 2019 by Matt Conradi
This has been an election campaign focused on Brexit and plans for fiscal spending. We believe a hung Parliament would lead to limited new tax legislation being approved due to the divergence in policies across the major parties. So let’s consider some of the key tax categories and the potential impact if there is either a Conservative majority or left-of-centre coalition.
If there is an outright Labour victory, which is viewed as unlikely, there will be a greater focus on higher tax from a narrow base.
Our Individual Tax Burden
Election campaigns are often characterised by one side offering tax windfalls to voters and the other looking to increase taxes on the rich to fund vote-winning giveaways. This time around the Conservatives have not felt the need to promise major tax cuts, as maintaining the status quo is seen as an attractively low-tax environment compared to Labour’s planned changes.
There is a planned increase to the threshold for National Insurance contributions to £9,500 initially and to £12,500 eventually, which is forecast to cost the government £9.2bn over the next three years. The upper tax threshold will no longer be raised.
In contrast, Labour have plans for a radical overhaul of the tax system that would see capital gains and dividends taxed at the same rate as other income. At the same time, earnings between £80,000 and £125,000 would be taxed at 45% and there would be a new 50% rate for earnings above £125,000.
Some of these policies might be watered down in the event of a left-leaning coalition, although in that situation the parties in the government will likely be broadly supportive of some level of income tax rises. The Liberal Democrats, for example, have proposed a 1% increase in income tax across the board to go towards the NHS and social care.
Looking at the manifestos, corporation tax is likely to, at best, stay flat. The Conservatives have said they will hold corporation tax at 19% and cancel the planned reduction to 17%. The SNP have said they will not support further reductions in corporation tax and all the other major parties have said they would increase corporation tax: Labour (26%), Liberal Democrats (20%), Green Party (24%). Only the Brexit Party have said they would reduce corporation tax by introducing a zero rate for the first £10,000 of pre-tax profits.
State pensions have been a key topic in the campaign so far, with all the major parties saying they would maintain the so called “triple lock”. There has also been support for compensating the ‘WASPI’ women from Labour, the SNP and the Liberal Democrats, along with pressure to freeze or reverse the planned increases in the state pension age to 68 by 2038.
On personal pensions, there have been very few pledges made beyond an effort to remove the annual allowance taper issue for doctors in the NHS which is stopping them from taking on extra hours. This is a wider issue that impacts many individuals across the UK and means it can be important to save more into your pensions earlier than you might think.
It’s unlikely that in the event of a left-leaning coalition, changes to personal pension rules would be a major priority as the revenue raising opportunities are relatively modest compared with changes to corporation and income taxes.
Buy-to-Lets and Second Homes
Buy-to-Let investors have seen a raft of rule changes over the last few years that have impacted on potential returns, such as increased stamp duty and the switch from mortgage interest deductions to mortgage interest relief. There has been talk from both the Liberal Democrats and Labour of increasing protection for tenants with a proposal to increase the length of tenancy agreements and in Labour’s case, make them open-ended.
For second homeowners there is potential for increased costs with the Liberal Democrats proposing up to 500% increases in council tax and Labour a new national levy equivalent to 200% of current council tax rates for second homes.
Practical Planning Considerations
No matter which party forms a government after the election, making the most of available tax allowances and wrappers such as ISAs and pensions will still play a key role in helping you achieve your goals. There has been no suggestion that ISA allowances or the tax benefits of pensions would come under attack after this election so they still represent two very powerful planning opportunities to lower your overall tax burden and to plan efficiently.
Don’t forget to make sure you are making the most of these allowances across your whole family. For example, a married couple with three children under 18 could put £53,104 a year into ISA wrappers.
Should you change your risk level?
We examine the thinking around risk and the implications of changing your risk level in detail here, but it is unlikely that you should change your risk level(s) in response to any of the potential election outcomes. You should only consider changing your risk level when something has changed in your life.
This could be a major life event such as having a child or retiring. Major life events will likely impact one or more of the three factors which help you decide the most appropriate risk level to achieve your investment goals.
Risk ability – Your ability to take risk is driven by your overall financial circumstances and for how long you wish to invest.
Risk willingness – Your willingness to take risk represents the level of fluctuations you are willing to accept in the value of your portfolios and in the size of a potential short-term, medium-term and permanent loss.
Risk need – Your risk need is the amount of risk you may need to take in order to achieve the returns required to meet your goals
If these three factors haven’t changed, then it’s likely that you would be best placed to remain invested as you are. Governments and their policies will come and go, so if your portfolio is suitably diversified then the impact of any market falls will likely be temporary.
Change your risk level in anticipation of these outcomes and you could be caught out as markets gyrate. The key is to focus on your longer-term objectives and accept that you will see some short to medium-term fluctuations, remembering it is the longer-term outcome that matters.
If you would like to discuss your financial plans with one of the team please get in touch via email@example.com
Please remember that when investing your capital is at risk.