The UK is about to head to the polls for the third time in four years and politicians are furiously campaigning to win over voters’ hearts, minds — and wallets.
The focus on Brexit is unrelenting, but with the major parties in the general election prioritising public spending over tax cuts, the outlook for our personal finances is extremely varied.
While the Conservatives have widened their lead in the polls, pundits are wary of ruling out the possibility of a hung parliament, a minority led-government or coalition.
Here, FT Money writers and experts review the key policies on personal tax, pay, pensions and property being touted by the three major parties as we enter the final two weeks of campaigning.
Boris Johnson has been forced to climb down on the income tax cuts he pledged during his leadership campaign, but the Conservatives have promised voters a “triple tax lock”, vowing not to increase income tax, national insurance or VAT rates for five years.
The party’s only proposed giveaway is to raise the national insurance threshold from the current £8,632 to £9,500 by 2020-21. The Institute for Fiscal Studies says this would hand a modest £150 tax break to the highest income 30 per cent of working households, but only about £30 to the poorest 10 per cent.
However, higher earners are firmly in Labour’s sights. The party plans to bring the 45p income tax band down from its current £150,000 threshold to those earning more than £80,000 a year and introduce a new 50p rate for those earning more than £125,000.
The Liberal Democrats plan to increase each existing income tax band by one percentage point — to 21, 41 and 46 per cent for basic, higher and additional taxpayers respectively.
So what would this mean for individuals earning £100,000 per year? Blick Rothenberg, the chartered accountant, calculates that under a Conservative government, they would take home £66,640 after income tax and national insurance, falling to £65,661 under the Lib Dems and £65,536 under Labour (see table below).
The differences are augmented further up the salary scale; someone with an income of £500,000 a year would take home £276,140 under the Tories, falling to £271,036 under the Lib Dems and £253,161 under Labour.
Labour would also clamp down on executive pay, has pledged to tax capital gains at income tax rates (see below) and would require all individuals earning more than £1m to file a publicly accessible tax return.
It would also scrap the residence nil-rate band, an inheritance tax relief introduced to enable a couple pooling their tax allowances to pass on a family home worth up to £1m to the next generation free of tax by 2020-21.
Rachael Griffin, tax and financial planning expert at Quilter, says that while the relief is very complicated, “scrapping the allowance and not replacing it with anything else will stem the flow of wealth between the generations”.
Labour also plans to get rid of “non-dom” status — which allows people whose permanent home or “domicile” is outside the UK to pay tax differently. Despite a recent crackdown under the Conservatives, HM Revenue & Customs statistics show that about 78,000 individuals claimed to be non-dom for tax purposes in 2017-18, down from about 90,000 in the previous tax year.
“The non-dom rules are complex but in overview, they allow certain individuals to exclude foreign income and capital gains from their UK tax calculations,” explains Chris Etherington, partner at RSM.
In its Fair Tax Programme, Labour described the status as “a colonial hangover . . . introduced to shelter British colonialists with foreign property from tax. It is an exception to the usual rule that UK tax residents pay tax on income and gains, wherever in the world they are made.”
Labour is also targeting trusts, which it described as “a key vehicle for tax avoidance and illicit financial flows”. If it wins, the party is planning to enhance the existing register of trusts to include all UK trusts and to make it accessible to the public. This contrasts with arrangements due to come into force next year ruling that the register can only be viewed by those with a “legitimate interest”.
Finally, the Lib Dems are the only party to commit to reviewing IR35 changes — new tax rules for freelance contractors due to come in next April that would result in many being taxed via PAYE with none of the benefits of employment.
Both the Lib Dems and Labour have big plans to change the way investments are taxed.
Currently, UK investors have an annual £2,000 dividend allowance and a £12,000 capital gains allowance.
Unless sheltered within an Isa, dividends above this level are taxed at 7.5, 32.5 or 38.1 per cent for basic, higher and additional rate taxpayers. For higher earners, the top rate of capital gains tax is 20 per cent, or 28 per cent for residential property.
The Lib Dems would scrap the CGT allowance, with capital gains and salaries to be taxed “through a single allowance”. They project this would raise £5.5bn a year.
Under Labour, both the CGT allowance and dividend allowance would be cut to £1,000, with dividends and gains taxed at the same rate as income — meaning a potential CGT rate of 50 per cent for the highest earners. This could raise an estimated £14bn.
Changes to the dividend tax would also hit pensioners drawing an income from their investments.
Calculations by AJ Bell, an investment platform, show that someone with an income of £49,000 a year receiving £5,000 a year in dividends would pay £8,000 in tax over 10 years under Labour, compared with £2,250 under the present system — which the Conservatives and Lib Dems plan to keep.
Someone earning £150,000 and receiving £5,000 a year in dividends would pay £20,000 in tax over 10 years, compared with £11,430 under existing arrangements.
“Labour’s plans around taxing dividends could end up impacting a greater number of people than just the corporate executives it wants to target with its policies,” says Ms Griffin.
“There are around 5m self-employed workers in the UK and a number of these will pay themselves through dividends taken from the companies they run to provide their services . . . this will have a significant impact on the way they run their businesses.”
Entrepreneurs seeking to sell their businesses could also be hit by reforms to entrepreneur’s relief, floated in both the Conservative and Labour manifestos. Currently, gains made on the sale of a business are taxed at a rate of 10 per cent, lower than the top rate of CGT.
The allowance is subject to a lifetime cap of £10m, yet there has been growing criticism of the relief, with the Association of Accounting Technicians one of a number of bodies calling for it to be scrapped. Labour plans to do this, while the Conservatives pledge to “review and reform” the relief.
“A business owner selling their business under [Labour’s] proposed regime could see a fivefold increase in their tax rate,” says Nimesh Shah, partner at Blick Rothenberg.
Labour also plans to expand stamp duty charges to all trades in equity and credit derivatives, corporate bonds and forex, excluding holiday money.
Millions of higher earners saving for retirement were spared changes to pensions tax relief as the three main parties opted for a “safety first” approach aimed at wooing older voters.
Prior to the manifesto launches, there was speculation that the £21bn in annual income tax relief — mostly credited to higher earners — would be targeted by parties looking to fund big spending promises.
However, higher earners are still frustrated by the pensions taper — a fiendishly complex piece of tax legislation which slashes the amount top earners can save tax-free into a pension to just £10,000.
The taper tax is causing widespread issues for highly paid consultants working within the NHS, and the Conservatives have pledged to hold an “urgent review” within the first 30 days of being elected to solve the annual allowance “taper problem”.
The Lib Dems have pledged to “listen and act” on the NHS pensions crisis.
Both Labour and the Conservatives are committed to keeping the “triple lock” on the state pension, ensuring more than 12m pensioners will see payments rise by the higher of prices, average earnings or 2.5 per cent. Both parties also vowed to preserve pensioner perks, such as free bus passes and the winter fuel allowance. The Lib Dems would restrict the triple lock to those claiming the basic state pension, phased out in 2016.
The parties are also seeking to woo older voters by protecting the state pension and the promise of a billion pound compensation deal for so-called “Waspi women” (Women Against State Pension Inequality). Labour has committed to pay £58bn in compensation to around 3.8m women born in the 1950s who the party said were not properly informed about rises to the female state pension age first legislated for in 1995. This could result in payments worth a maximum of £31,300 to millions of women in their 60s and 70s.
Labour would also freeze the state pension age at 66, and abandon plans for future age rises. The party also pledged to consider earlier access to the state pension for manual workers.
“The fact the state pension age isn’t mentioned at all in the Conservative manifesto document suggests the Tories have no intention of altering the existing timetable of increases,” says Tom Selby, senior analyst with AJ Bell. “This sets up the state pension as arguably the key battleground of this election campaign besides Brexit.”
The main parties have put forward a range of housing-related proposals as they seek to address voters’ concerns over house prices and affordability, problems with leasehold rules and the private rental market. Two groups look likely to lose out — landlords and overseas buyers.
All the main parties have pledged to put a rocket under rates of housebuilding, lifting the ambitious targets of previous elections in a bid to reverse the UK’s patchy performance on new homes.
The Conservatives are pitching a scheme to favour “local families” within new developments, by allowing councils to offer a discount “in perpetuity” of one-third for local buyers funded through taxes raised via the planning system.
Labour proposes its own discounted homes schemes for local buyers and first-time buyers, with prices linked to local incomes. It would do away with the current definition of “affordable” housing at up to 80 per cent of market rents. It has also committed to end the “right to buy” for council tenants.
One eye-catching policy from the Conservatives involves first-time buyers being able to fix their mortgage interest rates for 25 years, rather than the 2, 3 or 5 year deals that are common today. They say this would give homebuyers greater security over their future payments and cut the cost of a deposit.
Housing market experts say lenders would need to offer very low lifetime rates to tempt buyers to commit and not scare them off with onerous early repayment charges should they wish to move or pay off the mortgage early.
On the whole, first-time buyers are highly price sensitive, preferring the cheaper rates of shorter term fixes, says Ray Boulger, product technical director at mortgage broker John Charcol. “It’s a classic example of politicians not understanding that the market for which this product would be suitable is different from the one they’ve highlighted for political purposes.”
Overseas buyers will pay more under all the main parties’ plans, with the Conservatives pledging to impose a stamp duty surcharge of 3 per cent on their purchases (up from a 1 per cent charge already in the pipeline). Labour says it will go further, imposing a levy on their purchases of as much as 20 per cent — a move developers and agents say would be counterproductive for housebuilding rates.
Buy-to-let landlords have found themselves at the sharp end of Labour’s manifesto, which pledges to cap increases to private rents at the rate of inflation and to create “open-ended tenancies” as well as tougher sanctions for landlords who flout new national standards.
The Conservatives, meanwhile, want to help tenants threatened by rogue landlords by creating a “lifetime deposit” that moves with the renter — coupled with strengthened rights of possession for “good landlords”.
Childcare and social care
Support for childcare and early years education is shaping up to be a major issue in this election with Labour, the Liberal Dems and Conservatives all promising extra provisions to offer parents greater financial support.
“Childcare can be jaw-droppingly expensive, with the average full-time place costing £6,600, and over £9,000 in London. All three parties have recognised this is putting an intolerable stress on family finances and have made various pledges to ease the burden,” says Sarah Coles, personal finance expert at Hargreaves Lansdown.
“This will come as welcome news to parents — who will also be keen to see these pledges are backed up with enough funding to ensure the spaces are available and that the cost of childcare outside the free hours doesn’t end up rising as a result”.
Labour has pledged to extend 30 hours of free childcare to all youngsters aged two to four — which will bring over 880,000 more three and four-year-olds, and over 500,000 more two-year-olds into the system. It would also provide access to additional hours at a subsidised rate, depending on parental income. Over the longer term, Labour will also “work to extend” care to one-year-olds.
The Lib Dems have gone further, promising free childcare from when a child is nine months old for working parents. The party would introduce free childcare for all parents from the age of two.
Currently, one in four local authorities say the cost of providing free places is pushing up childcare costs for three and four-year olds outside their entitlement. So the Lib Dems would increase funding to cover the cost of providing the free spaces.
The Conservatives policies are aimed at parents of school age children rather than early years childcare. It has pledged £1bn for “wraparound childcare” focused on before and after school clubs and holiday clubs.
Royal London projects the Lib Dem proposals could save parents more than £20,000 per child over the pre-school years, and that Labour’s plans would result in a saving of nearly £10,000.
Labour would also end the VAT exemption on private school fees.
All three parties also take very different approaches to the hugely important issue of social care funding.
Labour has pledged free personal care and a £100,000 cap on personal contributions to other costs, such as residential care room and board. The Conservatives have pledged £1bn a year to plug gaps in the system until a cross-party agreement on reforming the entire social care system can be agreed, but have promised that no one needing care will have to sell their home to pay for it. The Lib Dems would add a penny to income tax to help fund increased spending on social care and the NHS.
“The best solution might involve a combination of all of these things,” says Steven Cameron, pensions director at Aegon, adding that it remains to be seen if “whoever is in power in future would seek, and be able to achieve, cross party consensus”.
Reporting team: Claer Barrett, Emma Agyemang, James Pickford, Lucy Warwick-Ching and Josephine Cumbo