Sun. Jul 14th, 2024

Will the election leave you better off?

Jun 15, 2024


This week we got the clearest understanding yet of what the main political parties are offering voters ahead of the election on July 4, as Labour, the Liberal Democrats, the Conservatives and the Greens all released their manifestos. The Scottish National party has yet to reveal its hand.

With Labour commanding a 20-point lead in the polls, the Tories require a drastic change in momentum to avoid a historic defeat.

But what could it all mean for your money?

FT reporters have analysed the election pledges — which, it must be said, should be taken with a pinch of salt: the Institute for Fiscal Studies (IFS) has described both the Prime Minister Rishi Sunak and Labour leader Keir Starmer as engaging in a “conspiracy of silence” over the true nature of the nation’s finances.

With less than three weeks to go to polling day, we try to find out whether the policies put forward so far stand to leave you better or worse off.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Tax

The Conservative party put £17bn worth of tax cuts at the heart of its manifesto, making pledges to cut national insurance, while not raising income tax, VAT or capital gains tax.

For the self-employed, the Tories pledged to abolish class 4 national insurance — currently charged at a rate of 6 per cent on profits between £12,570 and £50,270 — by 2029-30. The measure will cost £2.6bn, and would mean 4mn people — some 93 per cent of self-employed people — would no longer pay national insurance.

For employed people, after already cutting national insurance contributions twice in the past year, the party promised to take a further 2p off employee national insurance, at a cost of £10bn. If elected, this would mean the party would have halved the rate from 12 per cent at the start of this year to 6 per cent by April 2027 — worth £1,350 a year to the average worker, the Tories claim.

The IFS calculated that the cuts, along with other changes made since 2019 — including the ongoing freeze to tax thresholds — would mean most workers would be paying less tax by the end of the next parliament under the Tories than they would have been paying without any of the changes.

The Association of Independent Professionals and the Self-Employed welcomed the cuts to NI for self-employed people, saying it would give the sector a “much needed shot in the arm”. But its chief executive, Derek Cribb, adds that hundreds of thousands of self-employed company directors would not benefit from the measures.

Dave Chaplin, chief executive of Contractor Calculator, says the off-payroll working rules known as IR35, which affect company directors, were not working and had placed a “massive burden” on business.

“The self-employed have been let down and betrayed by the Conservative government over the past 10 years and it’s far too late to kiss and make up now,” he says.

The Labour party’s manifesto contained promises to “not raise taxes on working people”, ruling out increases to national insurance, VAT (other than on private school fees) and the basic, higher and additional rates of income tax.

However, the party’s decision to keep tax thresholds frozen at their current levels would be a tax rise by “the back door”, says Laura Suter, director of personal finance at AJ Bell.

“While freezing the tax bands until 2028 is a Tory policy, Labour have made no commitment to undo it,” she says. “It means that while it can avoid headlines about explicit tax increases, people will still be paying more in income tax than they would if Labour ended the freeze.”

Despite some speculation this week that Labour planned to change capital gains tax, this was not included in the party’s manifesto.

It did feature in the Liberal Democrats’ manifesto, however, which said the party would seek to raise an extra £5.2bn by introducing new higher rates — currently the highest rate charged on capital gains is 28 per cent.

The Lib Dem plan is to introduce a new 45 per cent rate on gains made over £100,000; gains of between £50,000 and £100,000 would attract a 40 per cent tax; while those under £50,000 would attract a 20 per cent tax.

Unlike now, where an individual’s CGT rate is determined by adding income and capital gains together, the party pledged to base the rate solely on gains. It also promised to boost the CGT tax-free allowance from £3,000 to £5,000 and bring in a new “inflation allowance”, so that any gains that are purely the result of inflation were not taxed.

Housing

Housebuilding and first-time buyers are big priorities for the main parties, as prices have moved out of reach of many buyers and housing supply has consistently fallen short of expectations. The Conservatives and Labour pledged respectively to build 1.6mn and 1.5mn homes in England over the course of the next parliament, both looking to reform burdensome planning restrictions and exploit brownfield sites for new homes. 

The Conservatives want to revive the Help to Buy equity loan scheme, which closed in 2022. This gives first-time buyers a loan of up to 20 per cent of the cost of a home (interest free for five years), allowing them to buy with a deposit of just 5 per cent. The scheme will run alongside the existing mortgage guarantee scheme, which also supports mortgages of 95 per cent loan-to-value.

The Royal Institution of Chartered Surveyors said the Conservatives had set ambitious building targets, but needed to address the “quagmire” of Britain’s planning system to push them through. Without this, the Help to Buy revival risked repeating the flaws of the previous scheme, which “inflated house prices across England, left thousands of buyers at risk of negative equity and failed to deliver good value for money for the taxpayer”.

Labour, too, aims to help low-deposit buyers with the help of a mortgage guarantee scheme. It promises to make permanent the existing scheme, which is due to end in 2025.

The Conservatives would set in stone the increase to the threshold at which first-time buyers pay stamp duty to £425,000 from £300,000 — a temporary measure introduced in 2022. It also plans a tax boost for landlords, with a two-year temporary relief on capital gains tax should they decide to sell to their sitting tenant.

Nathan Hudson, 49, who rents his home in York, does not trust either of the main parties’ records on home ownership — and is not in favour of reviving the Help to Buy scheme. “In a constrained market, with lots of buyers, it can only have increased prices,” he says.

“It’s a basic provision to have a roof over your head, but it seems the more expensive it’s become, the more celebrated it’s got,” says Hudson, who estimates that, were he to buy his flat, he’d pay much more in mortgage costs than he does currently in rent.

“I’m tempted to sit this election out,” he says, “I don’t want to be part of either party getting into power.”

Zoopla, the portal, analysed the value of properties sought by first-time buyers on its site, and estimated that eight out of 10 would pay no stamp duty if the threshold were made permanent. Those who stood to benefit most were concentrated across southern England, where nearly half of these buyers sought homes between £250,000 and £425,000.

Myron Jobson, senior personal finance analyst at broker Interactive Investor, said stamp duty changes could make a big difference to affordability, but other factors would remain an obstacle: “The main barriers to entry for many first-time buyers are high mortgage rates as well as the ongoing resilience in property prices.”

Labour is also looking at stamp duty changes, but as a way of raising revenue rather than easing costs for buyers. The surcharge rate paid by non-UK residents on top of domestic rates would rise — though the party has not yet given details.

Pensions

Labour’s “no surprise” manifesto was also light on detail around pensions after the party earlier dropped plans to reintroduce the lifetime allowance (LTA).

The £800mn U-turn ensures wealthier savers including hospital consultants and headteachers can continue to pay into their pot without fearing the reintroduction of a cap on tax-free contributions, which stood at about £1.073mn before it was scrapped by the current Conservative government.

The opposition party has pledged to keep the pensions triple lock — increasing the state pension every year by the highest of either the rate of inflation, average wage growth or 2.5 per cent each year — but said it would not match the Conservatives’ manifesto commitment to increase pensioners’ tax-free threshold in line with the annual increase.

Steven Cameron, a director at provider Aegon, said commitments to the pension triple lock offered pensions a valuable guarantee, though concerns remain over the sustainability of these pledges for the state of public finances.

“A return to typical historic levels of inflation and earnings growth may make it less costly or unpredictable in future years,” he says.

Labour has committed to a review of the pensions landscape and possible reforms to workplace pensions. The party has said it will also take advantage of consolidation and scale to boost investment in UK plc.

Jack Munday, a financial adviser at Saltus, welcomed Labour’s decision to scrap its commitment to reintroduce the LTA — which had been causing considerable concern among his clients — but was less than enthused with the pension offering in the Labour manifesto. “Nothing to get worried about; not much to get excited by,” is how he describes it.

Non-doms

Labour confirmed plans to change the taxation of so-called non-doms, UK residents whose permanent home is overseas. It also pledged to end the use of offshore trusts to avoid inheritance tax. It said the measures, along with increased investment in tackling tax avoidance, would raise £5.2bn in 2028-29, money which would be used to improve the NHS and deliver free breakfast clubs in every primary school.

However, some experts have poured cold water on the numbers. “It is doubtful that the changes to the non-dom regime will have the impact Labour suggest, as the number of remaining non-doms will fall dramatically as they can so easily relocate to friendlier jurisdictions,” says Miles Dean, head of international tax at adviser Andersen.

The Conservatives have also promised a crackdown on tax avoidance, seeking to raise up to £6bn a year extra from the measures. However, tax experts have warned that without a widening of the focus of such a crackdown to deal with errors made by taxpayers, the potential revenue raised would be limited.

“Neither Labour or the Conservatives can raise £6bn from clamping down on tax avoidance because there probably isn’t £6bn of tax avoidance,” Dan Neidle, founder of Tax Policy Associates, told the FT last month.

Line chart of Real average fee levels, index 2010=100*  showing Private school fees consistently rose at a rate above inflation until 2020

School fees

Labour confirmed its plan to introduce VAT and business rates on private school fees. Flagged ahead of the manifesto, the policy has led worried parents to reconsider their ability to fund private education for their children if schools pass on the full VAT charge. Labour expects to generate £1.5bn by the imposition of the tax. 

Fees have already been rising ahead of inflation, with an 8 per cent increase for the 2023-24 academic year, according to the Independent Schools Council. 

Samantha, 40, an accountant from Sussex, is against the policy. She put her son, who can suffer from anxiety, into private education to help his wellbeing. And while she intends to keep him there if Labour wins and the fees increase, she says it has affected her decision whether or not to have another child. “I had a Labour upbringing,” says Samantha, who was state educated herself, and declined to give her real name, “but I can’t support them [over this]. I think it’s a sweeping policy that’s not been well thought out.”

Some schools have been offering parents the opportunity to pay fees years in advance, with the aim of avoiding the VAT bill. “However, it is possible the VAT rules could be amended to prevent this, by making the VAT applicable when the service is delivered rather than invoiced — the devil will be in the detail,” says Jason Hollands, managing director at wealth manager Evelyn Partners. 

The policy may also have knock-on effects for parents’ other financial dealings. Many mortgage lenders, for example, include private school fees when calculating whether a borrower can afford a mortgage.

“An increase in the cost of these payments could worsen mortgage affordability . . . potentially limiting the amount that you could borrow,” said Chris Sykes, technical director at mortgage broker Private Finance.

Childcare

The Conservative party has already begun to roll out the first stages of its £4bn flagship childcare expansion package. Under the policy, parents of children from 9 months to school age in England will be entitled to 30 hours of free childcare, by September 2025. 

The weekly 15-hour entitlement for two-year-olds, which came into force in April, marked the first stage of the rollout.

However, the sector has warned it lacks the resources needed to deliver the expansion due to a crippling mix of rising costs, shortages of qualified staff and years of underfunding.

This has forced some providers either to limit or opt out of the extended offer, leaving parents struggling to benefit from the policy, which is available to parents earning at least the equivalent of a 16-hour minimum wage job and individually under the £100,000 threshold. 

Line chart of Rebased showing Earnings have failed to keep pace with the rise in part-time childcare costs for under-twos

Labour pledged in its manifesto to deliver the current government’s 30-hour childcare expansion programme.

In addition the party promised to create at least 3,300 children’s nurseries, using existing primary school buildings, creating more than 100,000 places for children from nine months old.

The party has also pledged to extend free breakfast clubs to all school primary pupils, paid for by its planned VAT levy on private schools.

Christine Farquharson, an associate director at the IFS, says plans to pay for the conversion of 3,300 primary school classrooms “may nudge the market in a different direction — but certainly won’t transform it.”

She adds: “By far the biggest choice Labour has made on childcare was the decision to sign up to the hugely ambitious expansion of funded childcare entitlements that the current government has introduced.”

The Liberal Democrats would double statutory maternity and shared parental pay from £184.03 to £350 a week and increase paternity leave pay to 90 per cent of earnings.

The party has also pledged to review funding rates paid by local authorities to providers that offer the funded hours, many of whom are sceptical that state funding will keep pace with inflation over time.



Source link

Related Post