We look at some Labour policies likely to have an affect on your personal finances.
The Labour Party’s manifesto has so far received the most scrutiny and attention. For some, it is a manifesto for a return to 1970s socialism and a tax grab; for others it is a bold break with a decade of austerity.
Below, we take a look at some of the policies likely to have an affect on your personal finances.
- Labour’s WASPI pledge: how much compensation will be received and how will it be funded?
- WASPI blog: my £12,000 Labour handout should go to the NHS
- What will the Liberal Democrats’ policies do for your personal finances?
- What will the Green Party's policies do for your personal finances?
- What will the Conservatives’ policies do for your personal finances?
Higher income taxes and higher inheritance tax
Those earnings more than £80,000 will “pay a little more income tax” according to the Labour Party. Income earned over £80,000 will be taxed at 45p in the pound, while income over £125,000 will be subject to the so-called “super-rich rate” of 50p.
Meanwhile, the party’s manifesto pledges a freeze on national insurance for everyone.
The Labour Party has also pledged to reverse inheritance tax cuts bought in under previous Conservative governments. In in the 2015 summer Budget, then-chancellor George Osborne announced that parents will be able to leave £500,000 in property without paying inheritance tax, phased in gradually between 6 April 2017 and 2020. Labour will reverse this.
More tax on capital gains and dividends
Labour has also made a commitment to increase the amount of tax paid on capital gains (CGT) and dividend payments.
According to the Party’s costing document: “Labour believes that returns from wealth should not be taxed less than those from income.” Labour plans to address this by bringing the tax levied on capital gains and dividends in line with that of earned income. This policy has been previously proposed by pro-Labour think tank Institute for Public Policy Research.
CGT is charged on profits from the sale of assets including shares, funds, second homes or buy-to-let properties, business premises, paintings and antiques worth over £6,000, with the rate dependent on the individual’s income and the type of asset sold.
Basic-rate income taxpayers pay lower CGT rates of 10% on gains from most assets and 18% on residential property, while higher-rate taxpayers pay 20% and 28% respectively. There’s an individual annual exemption of £12,000.
As for dividends, currently investors receive a £2,000 dividend tax allowance before any tax is paid. Once that is used up, the rate of tax you pay depends on your income tax band.
Dividends are taxed at a lower rate than for earned income, with the basic rate of 7.5%, higher rate of 32.5%, and additional rate of 38.1% kicking in above the £150,000 income level.
Those separate dividend tax brackets will be abolished, with both dividends and capital gains instead taxed in line with the broader income tax brackets of 20%, 40%, 45% and 50%.
Labour will also abolish the £12,000 annual exemption for capital gains, introducing a starting CGT threshold of £1,000. A new rate-of-return allowance will be introduced, set at the rate of a return of 10-year bond, to allow gains below this rate to be earned tax free.
Unsurprisingly, these new proposed rules are likely to prove unpopular among investors.
According to Laura Suter, personal finance analyst at AJ Bell: “The move to crack down on dividends will hit business owners who pay themselves through dividends rather than income, but also investors, with the capital gains tax allowance being slashed from £12,000 to £1,000 – which will cost up to £4,400 a year for those earning £50,000 or more.”
Rachael Griffin, tax and financial planning expert at Quilter, adds that the plan to bring dividend tax in line with income tax will likely end up impacting a greater number of people than Labour plans.
Griffin says: “There are around five million 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, and as such this will have a significant impact on the way they run their businesses.”
Another concern flagged by Ben Yearsley is the impact this tax hike on dividends will have when it’s combined with Labour’s plan to raise corporation tax.
He says: “Dividends are paid from taxed profits and corporation tax is also set to increase under Labour. So investors will have a double whammy - a smaller pool of taxed profits from which to pay dividends, and then higher tax on those dividends in an investor’s hands.”
However, it is worth noting that investors will still be able to shelter their capital gains and dividends from increased taxes through a stocks and shares Isa, which offers an annual allowance of £20,000.
Like the Lib Dems, Labour has committed itself to keeping the triple lock system, meaning the state pension rises according to the rate of wage increases, inflation or 2.5% - whichever is highest.
More controversially, the Labour Party has also committed itself to freezing the retirement age at 66, ending the government’s current commitment to gradual increases over coming decades. At the same time, the Labour Party manifesto says it will review the potential for a lower state pension age for those deemed to be engaged in physically arduous or stressful work.
According to Helen Morrissey, pension specialist at Royal London, keeping the pension age at 66 is “likely to cost many billions of pounds, and with no money set aside to meet these commitments it will be difficult to see how they can be funded.”
At the same time, says Morrissey, “paying state pensions at a different age based on doing heavy jobs would be extremely difficult to implement in practice as there are no records of what job people were doing, and defining what counts and does not count as heavy work would be very difficult in practice.”
The Labour Party has also committed itself to work with Waspi women to design a compensation system.
The manifesto additionally commits the party to creating a pension dashboard that includes information on fees, as well as an independent Pensions Commission to determine the amount that should be saved into workplace pensions.
With social care costs skyrocketing, there is a lot of pressure on each party to offer solutions. Labour’s is to create a National Care Service for England, intended to provide free personal care for older people.
Griffin, however, raises the question of funding. “The sustainability of such a cap is a big question mark over these care policies, as we have to remember it is today’s workers that will be funding it; as costs rise with an ever-ageing population, will it still be in place by the time they need to benefit?”