Please note that the views expressed in this article are the views of the author and should not be taken to constitute advice. There is no guarantee of future changes to taxation or other legislation.
“All change!”
All change? In some ways, but in terms of practical changes it is perhaps more a case of “some change”.
The swing in votes from the last General Election in 2019 is certainly significant but, as with most things in life, it needs to be taken in context. The Labour party received a real hammering at the last election, which seemed to be at least in part due to the electorate’s view of Labour’s then leader and issues within the party. Additionally, Parliament had not made any meaningful progress toward delivering the UK’s exit from the EU following the referendum 3 years earlier, and Boris Johnson was the only candidate of the main parties who demonstrated a will to complete the process. Had it not been for these factors, the results of the last General Election may have been somewhat different and the results today somewhat less spectacular.
Nevertheless, the 2024 election result is still very impressive and paves the way for change. Regardless of political colours, a degree of change can sometimes be needed. It is my view that the UK needed change, even though I would argue much of the negative narrative about the UK in recent years has been a little inaccurate and unreasonable when viewed in context.
The question now relates to the level of change we will see. The UK has been though challenging times in recent years, but this has not been unique to the UK. The UK economy has generally performed better than had been predicted in recent years, and we have started 2024 very positively when compared to our peers in Europe and the G7. We all have our problems, and decisions such as supporting Ukraine and boycotting Russian energy supply impacted Europe (and the rest of the world) hugely. This sits on top of the vast borrowing required to fund the covid/lockdown period, which itself was on top the borrowing already in place, much of which was purchased via Quantitative Easing which itself has potential economic implications. With interest rates having returned to more normal levels, the monthly cost of Government debt eats up a greater chunk of public funds every month. Although the UK’s debt vs GPD is the 2nd lowest in the G7, there is no room for complacency with such levels of debt.
Sir Keir Starmer is a fresh pair of eyes, ears, hands etc. He and his team have to make some very big decisions with regard to fiscal policy amongst others, and also the tricky topic of immigration. Although there has been much talk of the UK tax burden being the highest in 70 years, some may recall the reasons behind the lyrics in the Beatles’ song Taxman… “There’s one for you, nineteen for me”… relating to the huge rate of tax the band members were paying, at a time when the phenomenally successful band were said to have been advised by their accountants that two of them were close to bankruptcy with the other two not far behind. Moving from the 60s to the mid-70s, the starting rate for income tax was 35%, rising up to 83%. It was via this approach to taxation that the UK paid down the huge debt raised to fight the second world war. Today’s “tax-hikes” are more subtle – in general, frozen allowances for the masses and cuts to the allowances & thresholds which tend to affect wealthier individuals. While the Conservatives had made clear their intention to bring taxes down, they have perhaps misread sentiment on this topic versus other public concerns. In any case, there is a tightrope to walk with the economic impact of fiscal policy. When I undertook my Finance & Investment Management MSc at Aberdeen back in 2000/2001, we had access to a computer programme called “Running the British Economy” to demonstrate the impact of changing fiscal and monetary policy. I recall it was remarkably easy to cause fairly devastating outcomes, highlighting that macro-economics is a web where everything affects everything else, and a great deal of care is required – well beyond ideology.
So what can we expect? I would hope nothing too radical – initially at least. The UK economy started 2024 relatively well with relatively strong GDP growth. Similarly PMIs (measuring output from manufacturing and services) have been looking reasonably healthy and inflation is down. But there is a lot of sensitivity and a lot to do, not least tackling the crisis in the provision of NHS services where there is still a hangover from the overwhelming impact of Covid-19. In the background, Government debt that was issued at a time of very low interest rates will mature over time and will need to be refinanced at current rates, pushing up the cost of this debt burden. Investing in technology will continue to be very important – an economic factor which was highlighted by the renowned economist Robert Solow who passed away age 99 in December last year.
Labour have committed not to make changes to certain key tax rates (income tax, national insurance and VAT) but there are many other sources of tax. Politically, some are easier than others to tweak, i.e. those areas where wealthier individuals will be affected the most, but care is still required in such areas. In recent years we have already seen increases to dividend tax rates, slashing of the dividend and capital gains tax allowances, a large drop in the threshold for additional rate tax and a tapering of the pension Annual Allowance which slashes the tax relief available for very high earners. The Nil Rate Band for Inheritance Tax hasn’t increased since the last Labour Government (although a further Main Residence nil rate band was introduced for the family home).
The Labour manifesto did not rule out increases to the rates of capital gains tax. The core rates of capital gains tax were previously aligned to income tax rates (20%/40%) for a period until they were reduced in 2008 and again in 2016. Politically, increasing these rates would seem a fairly easy decision, although the level of additional tax this would raise may be limited. The allowance for capital gains for individuals has been slashed from £12,300 (2022/23) to the current allowance of £3,000, and it could be argued that further reductions may be inefficient.
Pensions have seen vast changes since “A-day” in April 2006, and most recently we have seen the abolition of that A-day phenomenon, the Lifetime Allowance (LTA). When this planned change was announced in the 2023 spring budget, the Labour party initially suggested that they would reverse this change (and other pension changes) if they came to office, but in reality it may be difficult to do this and they have since appeared to recognise this. A key driver for the pension changes announced in that budget was the impact of existing pension allowances on senior NHS Doctors, who were considered at risk of leaving the service as a consequence of the pension tax charges they were incurring (or likely to incur in the future). This reality would make it harder to reintroduce the LTA, although reducing the Annual Allowance would be more workable as the risk of Doctors exceeding this was, at the time, increased by rising inflation and the impact this had on the revaluation of benefits in the NHS pension scheme. Other pension changes could of course be considered, including limits to levels of tax relief. The treatment of pensions on death is another potential factor, but this would be a major change. Individuals should take care when planning for pensions, and seek advice.
Another key issue is immigration. Looking over to our neighbours, this a big issue which needs to be taken very seriously in the European corridors of power. The change in government we have seen today in the UK may seem major to us, but the rise in support for far-right parties throughout Europe is another kettle of fish and it appears that immigration concerns are very much part of this. The fact that Le Pen’s Rassemblement National (National Rally) won the first round of the French election should send shock waves, but this rise in far-right support is not new, having seen the success of far-right parties in countries such as Italy and the Netherlands. The UK, by contrast, has opted for change but the new Government is hardly a shift to the right. It is notable however that the party which came 3rd in vote share is the Reform party, but the FPTP system has resulted in a disproportionately low share of seats. We cannot assume the motivation of voters, but how the new PM deals with the very sensitive issue of channel crossings and broader immigration will be under great scrutiny, and he will be aware of this.
Overall, the biggest change for the UK initially is perhaps one of mood, and this counts for something. When it comes to taxation, pension legislation and other matters relating to financial planning I would hope for any initial changes to be moderate on the basis that the new PM and Chancellor will recognise that radical change would not be wise. The fact that Rachel Reeves has already stated that her first budget will not be before September indicates an intention to promote a non-radical approach. On 17th July we will have the state opening of Parliament and the King’s Speech. This should give us a better idea of what lies ahead.
On we go – all change. As that bastion of service Thomas the Tank Engine might say, “Peep peep, get in quickly please!”
God save the King.