The tax pledges to watch for in the UK election

tax Britain's Prime Minister Rishi Sunak speaks at a Tory party rally at the Amersham and Chiltern Rugby club in Amersham, England, Monday, May 27, 2024.(AP Photo/Alastair Grant, Pool)
Rishi Sunak's party has promised a tax cut for pensioners, with the triple lock plus. (ASSOCIATED PRESS)

UK election campaigns are in full swing with both Labour and the Conservatives setting out their stalls on key issues. The economy is a hot button topic across the board, with historically high interest rates and a cost of living crisis to contend with.

Hargreaves Lansdown (HL) laid out some potential tax pledges that could affect the wallets of ordinary voters the most.

  • The Conservatives have pledged to introduce Triple Lock Plus, which means the personal allowance will rise with the triple lock (by inflation, wage inflation or 2.5% — whichever is higher), so the state pension will remain under the taxable threshold.

  • The tax cut most likely to win people's votes is cutting council tax as 27% of Brits look for a party promising this. This is followed by cutting income taxes (13%).

  • The second most popular tax change overall would actually be to raise taxes specifically to spend on the NHS (25%).

  • Over the weekend shadow chancellor Rachel Reeves pledged Labour wouldn’t hike income tax or national insurance. She said there would be a review of tax reliefs.

  • Chancellor Jeremy Hunt pledged to get rid of the effective 60% tax rate on earnings between £100,000 and £125,140. He said he’d like to abolish national insurance and that inheritance tax was against Conservative values.

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Figures from a survey of 2,000 people by Opinium for HL in April 2024.

Sarah Coles, head of personal finance at Hargreaves Lansdown and Yahoo Finance UK columnist, said: “Over the past few days Labour and the Conservatives have brought out the financial big guns, loaded with tax pledges. Income taxes were in their sights, which is a key vote-winner.

"Meanwhile, inheritance tax also made it onto the agenda, which has the power to divide opinion. This is likely to be just the start of the tax speculation over the coming weeks, but voters are crying out for certainty.”

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown and Yahoo Finance UK columnist, said:

“The Triple Lock Plus is a tax-cutting bonanza for voters over state pension age. They haven’t benefited from national insurance cuts and have been hit by frozen income tax thresholds. There were growing concerns that the state pension itself would become taxable if it overtook the personal allowance. This change gives them a VIP invite to the tax cut party, apparently saving them £275 each by 2030 — at a cost of £2.4bn a year.

"However, the pledge will reignite the debate over intergenerational fairness. There’s already a significant income head start built into the triple lock, and this will push pensioners further ahead. It’s fair to say not all pensioners are solely reliant on the state pension — those who have saved into a pension or SIPP for their retirement will continue to be affected by income tax.

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"Anyone of working age will continue to face the threat posed by frozen tax thresholds — including the personal allowance. It has dragged an extra 2.6 million people under the age of 65 into paying tax since the 2020/21 tax year and is set to remain in place until April 2028. There will be plenty of new taxpayers of working age who wonder why they should pay a higher rate of tax purely because of their age.

"With the state pension bill continuing to boom, the concern is that future governments will be forced into making big changes such as hiking state pension age still further in a bid to manage costs. Given that healthy life expectancy means that many people will be forced to leave work well before state pension age, it means people will be left with a gap of several years, where they are too ill to work but too young to get state pension. Whoever wins the general election needs to implement a far-reaching review of the state pension system as a whole to make sure it remains sustainable in the long-term.”

Coles said:

“Around a quarter of people would be more likely to vote for a party promising council tax cuts (27%) or income tax cuts (23%), while one in six would be more likely to vote for cutting inheritance tax, and around one in ten say they’d be keen to vote for a party promising to cut tax on investments (11%). However, most of these have been notable by their absence in the debate so far.

"It’s not all about cutting taxes though, because one in 20 people (6%) said they’d be more likely to vote for a party pledging to raise taxes, while an impressive one in four (25%) said they’d be keen to vote for a party pledging to raise taxes specifically to pay for the NHS.

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"It would be interesting to see how this would play out in reality. It’s always easy to say you’d vote for extra money for the NHS, but it may be harder for people to actually do. Some 14% of people said they’d be less likely to vote for a party opting to raise taxes to pay for the NHS, and 27% said they’d be less likely to vote for tax rises in general.

"In fact, some tax cuts would actually be unpopular with a big chunk of voters. The most unpopular is a cut in inheritance tax at 12%, which demonstrates how difficult it can be to implement a tax cut that only benefits such a small proportion of the population."

Shadow chancellor Rachel Reeves delivers a speech during a visit to Rolls-Royce in Derby, while on the General Election campaign trail. Picture date: Tuesday May 28, 2024. (Photo by Stefan Rousseau/PA Images via Getty Images)
Shadow chancellor Rachel Reeves delivers a speech during the Labour campaign trail. (Stefan Rousseau - PA Images via Getty Images)

Whoever is elected, the experts said there should be three priorities for tax policy to help anyone who is trying to save or invest for the future.

When you’re investing for five-to-10 years or more or putting money into a pension or a SIPP to help support you decades down the line, you need the security that comes with knowing that tax policies won’t be chopping and changing throughout that time. It’s not always easy to free up money to put aside for the future, so you need to be sure you’ll get the benefits you’re expecting.

There have been cuts to dividend tax and capital gains tax allowances over the past two years. The dividend tax allowance has dropped from £2,000 to just £500 — which is just a tenth of the level when it was first introduced in 2016. Meanwhile, the capital gains tax allowance has been slashed from £12,300 to £3,000. It hasn’t been this low for more than 40 years. Those who have invested outside an ISA or pension were trying to do the right thing by putting money aside for the future — but have been hit by unexpected taxes as a result.

Over the past few years there has also been plenty of discussion about cutting inheritance tax. This would be popular with one in six people, but that goodwill would soon unravel if it turned out to be a piecemeal change that was repeatedly tinkered with.

The inheritance tax regime is ripe for change, including a review of allowances, the experts said. There is also real scope for simplification by abolishing the £175,000 nil rate residency band and raising the IHT threshold to £500,000, which would make things far easier, without a particular distortion of behaviour or revenue. However, these changes need to be part of a holistic review of the tax, so we can be confident they will stick.

Income tax has naturally become more complex with regional differences in the thresholds and rates, but tax relief on things like pensions implemented on a UK basis. Any changes need to make it straightforward for people to navigate the tax landscape and do what’s best for their circumstances. They should also include a transitional period of at least a year, to make it easier for people to plan for.

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Taxes need to be considered in the round. This year has seen changes to taxes on incomes that fight against one another — cutting the rate of national insurance, while leaving the freeze on thresholds in place. This seems counter-intuitive and is a classic example of how a more holistic approach could have avoided a series of confusing tweaks and changes.

Putting money aside is in everyone’s interest as it's important to have the security that comes with knowing we’ll have the income we need, while the state can be confident we won’t turn to them in desperation. And yet, we haven’t always seen this play out in the tax system.

We have seen no change at all to the ISA allowance since it first reached £20,000 in 2017. If it had risen with inflation, it would be worth around £26,000. It begs the question of why the allowance has had a real terms cut at a time when more people need to be saving and investing for their future.

Meanwhile, there are other changes to tax-efficient products that could make a striking difference to people’s lives. Take the Lifetime ISA: the 25% penalty for accessing money for purposes other than buying a first home or for retirement not only removes the effect of the government bonus, it also takes a chunk of people’s hard-earned savings. Reducing the early access penalty to 20% means people will not lose any of their own money should they need to access their money early. This could particularly help groups saving for retirement such as the self-employed who may have variable income and may need to access their money.

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At this stage, we don’t know what the parties have up their sleeves, but we have a window of opportunity before the election and any early Budget announcement to protect ourselves.

If you have investments outside an ISA or pension, it makes sense to use your allowance to realise gains gradually over a period of years, and you can make a start sooner rather than later.

The best way to protect investments from taxes is to hold them in an ISA. You can move existing investments into ISAs through share exchange (also known as bed and ISA), so you can protect up to £20,000 in the current tax year.

The annual pension allowance is £60,000. The fact you get tax relief at your highest marginal rate means higher earners in particular should take as much advantage as makes sense for their finances.

The Junior ISA allowance has been £9,000 a year since April 2020 — the highest this allowance has ever been. It means there’s a real opportunity to put aside a nest egg for qualifying children and protect this money from tax at the same time.

Frozen thresholds mean more people paying higher rates of tax, at which point their personal savings allowance shrinks significantly (from £1,000 for basic rate taxpayers to £500 for higher rate taxpayers or £0 for additional rate taxpayers). It means it’s worth considering a cash ISA. This has the added benefit that if the next government were to make changes to the personal savings allowance, your cash would be protected.”

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