How election pledges could affect your finances
Jeremy Corbyn unveils Labour’s ‘most radical’ plans in decades, while the Conservatives reveal National Insurance cuts as part of their manifesto launch.
The 2019 general election takes place on 12th December and within the last week both Labour and the Conservatives have set out their policy agendas. Here, we outline five tax proposals that could impact your finances.
1. Income Tax and National Insurance
Labour’s manifesto proposes lowering the point at which individuals pay 45% Income Tax to £80,000 (from £150,000), and introducing a new ‘super-rich’ rate for those with salaries of £125,000 and above. This new top rate is not detailed, but it is presumably the 50% proposed in 2017. Tax rates for everyone with income below £80,000 would be frozen. Labour says it would also freeze current rates of National Insurance, at least for individuals.
According to the Institute for Fiscal Studies, Labour’s plans would increase the tax bills of 1.6 million individuals and would raise up to approximately £3 billion a year.
During his leadership campaign, Boris Johnson promised to reduce Income Tax by raising the 40% threshold for higher-rate taxpayers from £50,000 to £80,000. This plan has now been ditched after the prime minister said he had decided to focus tax cuts on “people who need them most” by raising the threshold for National Insurance contributions to £9,500 next year.
2. Inheritance Tax
Inheritance Tax (IHT) is currently charged on estates worth more than the £325,000 nil rate band. The residence nil rate band provides individuals with an exemption of a further £150,000 on the transfer of a family home on death.
In its funding document, Labour cites Treasury analysis which describes the exemption for family homes as being “most likely to benefit high income and wealthier households”. Labour says it would therefore scrap the residence nil rate band, raising an estimated £5 billion.
Sajid Javid told the Conservative conference in September of his wish to scrap IHT, at a cost of £5 billion, saying, “It’s something that’s on my mind.” The Tory manifesto does not include a promise to abolish IHT, although one would expect the second set of proposals made by the Office of Tax Simplification to be seriously considered if a Conservative government is retained.
3. Capital Gains Tax
Currently, gains in excess of the £12,000 annual allowance are charged at 10% or 20% depending on your other income. These rates are 18% and 28% for residential property.
Labour says it will “end the unfairness” that sees income from wealth taxed at lower rates than income from employment. Under its proposals, Capital Gains Tax (CGT) would be brought into line with Income Tax rates. This would raise an estimated £9 billion.
The party would also scrap Entrepreneur’s Relief. This allows business owners to pay a lower rate of Capital Gains Tax (CGT) when they sell a business compared to the normal rate.
The Conservative manifesto doesn’t detail any change to the main rates of CGT, although the party says it wants to “review and reform Entrepreneur’s Relief”.
4. Dividend Tax
Currently, basic rate taxpayers pay 7.5% on dividends above the £2,000 tax-free allowance. For higher rate taxpayers that rises to 32.5%, and 38.1% for additional rate payers.
The party has pledged to equalise the tax treatment of income from dividends with normal taxable income. Although not explicitly stated, the implication is that the dividend allowance would be scrapped.
Nothing on the taxation of dividends is contained in the Tory manifesto.
5. Second Homes
Labour says it will apply an annual levy on second homes equivalent to 200% of the current council tax bill for the property. It estimates this could raise up to £560 million a year.
The Tory manifesto does not detail any plan to increase taxes on second homes.
There are marked differences between the parties with Labour planning to spend an extra £82.9 billion by 2023/24 and the Conservatives a further £2.9 billion.
At the time of writing, Boris Johnson and the Conservatives have a clear lead in the polls. However, opinion polls have not had a good track record of late.
Regardless of which party is in power after 12th December, the various tax reliefs and exemptions available are unlikely to get materially better than they are currently. Therefore, investors are advised to seek financial advice ahead of the election to discuss the appropriateness of taking action to improve their tax health.
The levels and bases of taxation, and reliefs from taxation, can change at any time. Tax relief is dependent on individual circumstances.
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