What Does a Labour Government Mean for Your Money?
With a focus on growing the economy and “keeping taxes, inflation, and mortgages as low as possible,” Labour's manifesto emphasizes wealth creation. To achieve these goals, Labour may need to implement changes affecting taxes, allowances, and various investment schemes and rules. However, a leading think tank, the Institute for Government, suggests that Labour's spending plans may exceed anticipated new revenue. The Institute for Fiscal Studies has also expressed uncertainty about how Labour will balance their financial commitments.
While the manifesto isn't legally binding, it provides insight into Labour's plans for governance. Here are the key pledges and their potential impact on your personal finances and the financial markets:
Pensions
- Lifetime Allowance: Labour will not reintroduce the lifetime allowance, a cap on pension savings before tax.
- Triple Lock: Labour commits to maintaining the pensions triple lock, ensuring state pensions increase annually based on the highest of wage growth, inflation, or a minimum of 2.5%.
- Pension Review: Labour plans to review the pensions landscape to improve outcomes, though details are currently unspecified.
Inheritance Tax
- No Mention: The manifesto does not address future inheritance tax rates or reliefs like Business Relief and Agricultural Property Relief.
VAT
- Private School Fees: Labour will introduce VAT on private school fees and end their business rates relief, raising an estimated £1.5bn. This change is expected to take effect in 2025, providing families time to adjust.
Income Tax
- No Rate Increases: Labour pledges not to increase income tax rates but may use fiscal drag, where inflation and income growth push taxpayers into higher brackets.
- Dividend Income: Potential changes to taxes on dividend income could be outside the pledge's scope.
- Carried Interest: Labour aims to reform the taxation of carried interest, currently treated as capital gains. This will mostly impact private equity, venture capital and hedge funds.
Capital Gains Tax (CGT)
- No Major Changes: Labour has no plans to reform CGT rates, except for carried interest. They have ruled out applying CGT to primary residences.
- Possible Future Increases: Although not currently planned, future increases in CGT rates have not been entirely ruled out.
National Insurance Contributions
- No Rate Increases: Labour supports the current NI rates but may use fiscal drag.
Non-Domiciled Rules
- Offshore Trusts: Labour plans to end the use of offshore trusts to avoid inheritance tax.
Stamp Duty Land Tax (SDLT)
- Increase for Non-UK Residents: Labour plans to raise SDLT for non-UK residents from 2% to 3%.
Corporation Tax
- Cap at 25%: Labour pledges to cap corporation tax at 25% and respond to international tax changes to maintain UK competitiveness.
The Impact on Financial Markets
Political policies impact markets primarily through interest rate expectations. Inflationary policies can lead to higher interest rates, affecting government bonds, mortgage rates, and the pound's value.
Labour's spending plans appear ambitious, and if not matched by tax revenues, could lead to higher borrowing and market interest rates. However, the new government has indicated a cautious approach to spending, suggesting no immediate market shocks.
Conclusion
The immediate market reaction to a Labour government has been minimal, given the party's lead in the polls. Major market movements are expected only if unexpected policies are announced, likely during the autumn budget. This will provide a clearer picture of Labour’s spending and tax plans.
