In this analysis, some of the team at AJ Bell have already been diving into the detail of Labour’s manifesto which was released this morning. They’re sharing their thoughts not only on what it contains but also the elements which advisers and wealth managers need to consider.
The manifesto policy document focuses on economic stability with 83 mentions for the economy – the Conservative manifesto referred to it 50 times.
There is no mention of taxes on investment gains or dividends. The freeze on income tax thresholds is likely to remain, although Labour commits not to raise tax rates on NI, income tax or VAT. However, Labour is promising a wide-ranging review of the pensions landscape whilst pledging its commitment to retain the state pension triple-lock.
Tom Selby, director of public policy at AJ Bell, comments:
“While there are many reasons savers and investors might feel relieved following the publication of Labour’s manifesto, they will have had to read between the lines and hark back to previous announcements to find the policy meat in Keir Starmer’s catalogue of photo opportunities. The 136 page document makes 83 references to the economy, which compares to 50 by the Conservatives in theirs, and continues a trend we’ve seen from Labour since Liz Truss torpedoed any sense of a post-pandemic economic recovery during her brief spell in the hot seat in 2022.
“Starmer and Reeves have been leaving a long and winding trail of breadcrumbs on their intentions for the country since January when they published their plan for financial services, with subsequent announcements on pensions and personal taxation being heavily previewed throughout this election campaign. We’ve looked at what their plans could mean for Brits’ personal finances should Labour win the election on 4 July.”
Lifetime allowance plans scrapped…but pensions set for broader review
“The decision to scrap the pensions lifetime allowance for good in April this year was both necessary and sensible. Labour therefore deserves credit for recognising this and dropping plans to reintroduce the limit, a move which would have risked hitting senior public servants, including doctors, with huge tax bills, added unwelcome complexity to the pensions tax system and unfairly penalised those who enjoy strong investment growth.
“Labour’s commitment to stability should give savers confidence to plan for the future. This move also supports wider efforts to boost investing, including in UK companies. Any pension tax reform taken forward by the next government should focus squarely on simplification and encouraging more people to save for the long term.
“In addition, Keir Starmer’s party says it will carry out a wide-ranging review of the pensions landscape if it wins power, with the aim of improving outcomes and encouraging greater levels of investment in UK markets. While the focus on pushing greater investment in UK plc is understandable, it is critical the interests of savers are at the heart of any future reforms.
“While ensuring the investments held by auto-enrolment default funds are appropriate is clearly important, ultimately the biggest driver of retirement outcomes is contribution levels. It is therefore likely the next government will need to think carefully about the question of pension adequacy and how to scale up minimum contribution rates beyond the current level of 8% of qualifying earnings.”
State pension triple-lock here to stay…for now
“We have known for a while that both Labour and the Conservatives would commit to the state pension ‘triple-lock’, which guarantees the benefit rises each year by the highest of average earnings growth, inflation or 2.5%, in their respective manifestos. However, Labour has not moved to match Rishi Sunak’s ‘triple-lock plus’ pledge, which would apply the same guarantee to the personal allowance of those over state pension age.
“If Keir Starmer emerges victorious after the 4 July election, he will face two clear state pension challenges. Most immediately, Labour will need to consider how to deal with the problem that the full new state pension will soon be higher than the personal allowance, dragging more retirees into paying income tax.
“Over the longer term, the next government needs to set a clear direction for the state pension, moving beyond the random ratchet of the triple-lock. Ultimately, we need to reach a lasting consensus on what the state pension should be worth and for how long on average people should receive it, allowing Brits to plan for retirement with confidence.”
Radical ISA simplification on the cards?
“ISA reforms are absent from the Labour manifesto but the party previously backed simplification in its plan for financial services.
“There are now six versions of ISAs that people are required to navigate, with different rules and allowances further complicating the picture. Many people find the array of choice on offer confusing, so a ‘back to basics’ approach would help build on the core feature of ISAs, which is their simplicity.
“A full review of ISAs would provide an opportunity to prevent them being suffocated by incremental complexity, which could eventually see ISAs turned into a political football in the same way as pensions taxation.
“Research we’ve conducted shows that the ISA ‘brand’ is widely recognised by the UK public. But once people are asked to identify the various different types of ISA available, knowledge levels plummet.
“AJ Bell has previously urged the government to merge the six existing ISA brands into a single ‘One ISA’ incorporating the best features of those products. As a stepping-stone to that ultimate goal, policymakers could focus on combining the two most popular ISAs, Cash ISAs and Stocks and Shares ISAs, a reform which would support the wider policy objective of getting more people to invest for the long-term, including in UK companies and funds.
“There is also a strong argument for upgrading the ISA allowance to £25,000 to support this goal – a change which would likely have a similar impact to the ill-thought-through ‘British ISA’ proposed by the previous administration without layering on unwelcome complexity. The fact neither the Labour nor the Conservative manifestos mentioned the British ISA hopefully means this proposal will be chucked in the policy bin, regardless of the election outcome.”
Tory income tax deep freeze would be inherited by Reeves
Laura Suter, director of personal finance at AJ Bell, comments on the continuation of the income tax freeze under Labour:
“Labour has repeated its claim that it won’t raise taxes ad nauseam, but by not ending the freeze on income tax bands it is bringing tax hikes in through the back door. While freezing the tax bands until 2028 is a Tory policy, Labour have made no commitment to undo it. It means that while it can avoid headlines about explicit tax increases, people will still be paying more in income tax than they would if Labour ended the freeze.
“The freeze on income tax thresholds means that millions more people will be dragged into higher rates of tax. The OBR estimates* that by 2028-29 the deep freeze on tax thresholds will see almost 4 million extra taxpayers, 2.7 million more moved to the higher rate of income tax, and another 600,000 paying the additional rate. On top of that, many households will pay thousands more in income tax than they would have done had thresholds been indexed in line with inflation.
“If the personal allowance, currently fixed at £12,570, had been adjusted for inflation since 2021/22 when the freeze was put in place, it would increase to £15,989 by 2028 – almost £3,500 more than it will be if the freeze continues. Additionally, if the higher rate threshold had been linked to inflation since 2021/22, it would rise by £13,674 to nearly £64,000 by 2028, according to AJ Bell calculations based on the latest inflation forecasts from the OBR.
“The difficulty for the next government is that the freeze on income tax bands is baked into the budget for future years, and unwinding this comes with a large price tag. Labour may well highlight that they can’t afford to end the freeze and return thresholds to where they would have been. But if they don’t end the freeze they can’t also claim that taxes won’t rise under a Labour government.”
*OBR March forecast, page 67: https://obr.uk/docs/dlm_uploads/E03057758_OBR_EFO-March-2024_Web-AccessibleFinal.pdf
| Inflation linked allowances | |||
| Year | Inflation rate | Personal allowance | Higher rate threshold |
| 2021/22 | 3.1% | £12,570 | £50,270 |
| 2022/23 | 9.1% | £12,960 | £51,828 |
| 2023/24 | 7.3% | £14,139 | £56,545 |
| 2024/25 | 2.2% | £15,171 | £60,673 |
| 2025/26 | 1.5% | £15,505 | £62,007 |
| 2026/27 | 1.6% | £15,737 | £62,937 |
| 2027/28 | 1.9% | £15,989 | £63,944 |
| Source: AJ Bell. Inflation rate taken from March 2024 OBR report based on actual figures for all available and then forecasts for future years. | |||
