X is for tax
The general election taxation plans of each political party may differ, but taxes will rise nonetheless.
As the general election draws closer, rival political parties have been setting out their taxation and spending plans in more detail. These have varying implications for taxpayers and investors.
Whoever wins the election, and whatever their promises, voters should expect higher taxes in the year ahead. That’s because all governments tend to front-load unpopular tax increases and spending cuts early in their tenure. Since 1992, every UK government has raised taxes by at least £5 billion in its first year, according to the Institute for Fiscal Studies.
There is little profit to be had from advertising these intentions, however; unless it involves taxing the wealthy, which plays well to part of the electorate. That makes pensions an increasingly popular place to look for raising money.
Pensions have been described as the juiciest, lowest-hanging fruit in Whitehall, and changing pensions tax relief is a less obvious way of raising money than increasing headline taxes. The Conservatives will taper the annual allowance for those earning over £150,000, from £40,000 down to £10,000 for those earning more than £210,000. It says it will use the money to make Inheritance Tax (IHT) concessions, of which more later.
Lower lifetime allowance
Labour says it will cut pensions tax relief to 20% for those earning more than £150,000. It would use the proceeds to reduce university tuition fees from £9,000 a year to £6,000. The Liberal Democrats have proposed a flat rate of relief for all. They would also cut the lifetime allowance to £1 million – indeed, the allowance, which fell from £1.8 million to £1.25 million during the last parliament, is likely to be cut to £1 million whoever comes to power.
The message for pensions savers who want to make the most of their contributions is that they should take advantage of the current rules before they change, and contribute sooner rather than later.
When it comes to more direct taxes, the Conservatives say they will use the money saved from pensions tax relief to fund an increase in the IHT nil-rate band. A new family home allowance of £175,000, when added to the existing nil-rate band of £325,000, would allow individuals to pass on assets worth £500,000, free of IHT, where they included the family home. For married couples, that doubles up to £1 million. For estates worth more than £2 million, however, the new allowance will be gradually withdrawn. Once an estate reaches £2.35 million, it disappears altogether.
While good news if it happens, this wouldn’t remove the need for IHT planning. It only affects a relatively narrow band of estates and, even for them, house price growth could make IHT payable once again quite soon.
The UK Independence Party wants to abolish IHT altogether. The Green Party, on the other hand, proposes an ‘accessions tax’. This would determine the tax on a legacy according to the income of the person receiving it. If they pay tax at the basic rate, it would be tax-free.
Tax thresholds have also been receiving some attention. The Tories plan to raise the 40% threshold to £50,000 by 2020. They would also increase the personal allowance to £12,500, as would the Liberal Democrats.
Labour would restore the 10p starting rate for Income Tax. It would take the additional rate back to 50%, and so would the Scottish National Party. The Greens would raise it to 60% and levy National Insurance at 12% on all income, combining to produce a 72% marginal rate for the highest earners.
Both Labour and the Lib Dems want to introduce a mansion tax on homes worth £2 million or more, though their schemes would work in different ways. A centrepiece of Labour’s tax proposals is a plan to remove UK tax benefits applying to non-domiciles.
It is generally believed that neither the Conservatives nor Labour will be able to form a majority government on their own, which would be needed to give them an entirely free hand in implementing their chosen policies. It is, however, inevitable that one of them will be the most powerful party in power and, as such, able to push through most of its plans. The minor parties may be able to influence Conservative or Labour proposals, perhaps by watering them down, but they are unlikely to be able to push through any tax plans of their own that are radically different.