What the main parties mean for your taxes: tldr you’ll pay more
- The Conservatives have pledged not to raise income tax, VAT or capital gains tax. Labour has promised not to raise income tax, National Insurance, or VAT. However, there’s every chance taxes will rise overall.
- Both are silent on tax thresholds, which are expected to stay frozen – including income tax. This will add £620 to the tax bill of someone earning £30,000 by the end of the freeze.
- The Conservatives say they’ll increase the personal allowance for pensioners in line with the triple lock, cut the National Insurance main rate by 2p, and axe the 6p National Insurance rate for self-employed people.
- The IFS says when the Conservative income tax and NI policies are taken together, those earning £24,000-£62,000, and almost all self-employed people would pay less tax on their income. Lower earning employees and pensioners paying the basic rate of tax will pay more.
- The Conservatives have focused on taxes that Labour hasn’t categorically ruled out, including capital gains tax, changes to pensions tax relief and tax-free cash, which could cost thousands of pounds.
- Our research shows tax divides voters – 27% say raising taxes would deter them from voting for a party, but 25% say hiking taxes specifically to pay for the NHS would make them more likely to vote for someone (2,000 people by Opinium for HL in April 2024).
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“Whoever gets elected, there’s a good chance you’ll pay more tax. This isn’t just because of how the maths stacks up on the pledges both main parties have given. It’s also because so many spending cuts have been built into assumptions that unless we get particularly robust economic growth in the near-term, sticking with the fiscal rules may leave the government with a difficult choice between incredibly uncomfortable cuts or painful tax rises.
Neither of the main parties have pledged to tackle frozen income tax thresholds, so regardless of who is elected, anyone who gets a pay rise is likely to face a bigger income tax bill. However, the Conservatives have made additional pledges on National Insurance which will unwind the impact of those frozen thresholds for middle earners and self-employed people, who will be better off than if the tax freezes and NI cuts had never happened. They’ve also pledged to raise the personal allowance for pensioners, and while this might spare most of those who don’t get any income on top of the state pension, pensioners paying basic rate tax will still be paying more tax on their income.
Even if you’re better off when it comes to income taxes, you could find it very quickly unwound by other tax rises. Council tax hikes haven’t been ruled out by either party, for example, and a 7% annual rise would add another £675 a year to the average Band D bill.
Savers and investors may be worried about more potential tax, because Labour hasn’t ruled out changes to capital gains tax and dividend tax. Meanwhile, neither party has confirmed they’ll definitely be keeping the personal savings allowance. Similarly, while nobody has proposed changes to pensions tax relief or tax free cash, the Conservatives have ruled it out, but Labour haven’t. Once we get into the realms of things that haven’t been categorically denied, the potential tax costs grow. That’s why it’s so vital that people consider things like ISA and pension to ensure their assets are as tax-efficient as possible.
The ‘science’ bit
Taxes on income
The biggest hit to tax would come from the frozen tax thresholds. Someone earning £30,000 and getting pay rises of 4% a year will pay £620 more in tax between this tax year and the end of the freeze in 2028 than if the thresholds had risen.
The Conservatives have made some promises to offset this for some people. They pledged to increase the personal allowance for pensioners in line with the triple lock, to cut the National Insurance main rate by 2p, and axe the 6p National Insurance rate for self-employed people.
The IFS calculates that adding these changes to frozen thresholds means employees earning between £24,000 and £62,000, and almost all self-employed people would pay less tax. An employee on £35,000 would pay £260 less tax by 2028/29 and a self-employed person making the same would pay £1,230 less tax.
However, an employee working full-time on the minimum wage would pay £240 more tax thanks to the changes. Despite the proposed change in the personal allowance for pensioners, once you factor in the impact of frozen thresholds so far, those paying basic rate tax would still be paying £490 a year more tax overall.
Council tax bands
Both Labour and the Conservatives have pledged not to change council tax bands, and the Conservatives wouldn’t change discounts. However, council tax is still likely to rise – if it goes up 7% a year it would add £675 a year to the average Band D bill by 2029/30.
Capital gains tax
The Conservatives have ruled out raising capital gains tax, and are highlighting the fact that Labour won’t do the same. It’s worth saying that you don’t have to raise the rate of tax to force people to pay more. The cutting of the tax threshold from £12,300 to just £3,000 over the past two years has meant more people paying more of this tax, without the rate changing. Likewise, the freezing of the income tax thresholds has pushed more people into the higher rate tax band, where they pay a higher rate of CGT too.
Labour haven’t proposed raising this tax. If they were to do it, they’d have a wide range of options and we don’t know which they’d pick. However, if they decided to equalise CGT with income tax, it would cost a higher rate taxpayer with a stocks and shares gain of £30,000, £5,400. With so many uncertainties, it’s important not to let fear drive your behaviour, but if you are planning to use your ISA allowance this year, doing so sooner rather than later gives you peace of mind that your investments are protected from changes any future government may make.
Pensions tax relief
Labour haven’t proposed changes to pension tax relief, and it was a long time ago that Rachel Reeves floated the idea of a flat rate of tax relief – and hasn’t mentioned it since. It means we’re not expecting any quick changes to pensions tax relief. However, if a flat rate of 33% was introduced, a higher rate taxpayer earning £95,000 and putting £40,000 into their pension would lose £2,800of tax relief a year. It’s vital not to base your plans on guesswork, but if you are intending to put money into your pension this year, and you have it available now, it may make sense to do so sooner rather than later so you know exactly where you stand.
Tax free cash
The 25% tax-free cash on pensions has been guaranteed by the Conservatives, but not Labour. They haven’t made any suggestion they will touch it, but won’t be pressured into making any assurances. It’s essential that fear of a change doesn’t drive you into any sudden movements, because withdrawing money from somewhere tax-efficient, where it has real growth potential, shouldn’t be something you rush into.
Changes to tax free cash would come at a cost. Someone with a £500,000 pot can normally currently take up to £125,000 tax free. If tax free cash was cut to 20%, they could take £100,000. If the other £25,000 was taxed at basic rate over the course of their retirement, it would cost them £5,000, and if it was all taxed at the higher rate it would cost £10,000.
Tax on savings
Neither party has pledged to keep the personal savings allowance. It would be politically difficult, because it’s such a popular tax relief, but it’s a relatively new one and nothing is set in stone. Losing the allowance would cost someone with £1,000 in interest, £200 a year – assuming they don’t get the starting rate for savings and they’re not an additional rate taxpayer. It’s another reminder that tax allowances are never set in stone, so the best way to protect your savings from tax completely is to consider a cash ISA.
Dividend tax
This hasn’t merited a mention by either party – and changes haven’t been proposed or ruled out. However, we know from how the Conservatives cut the dividend tax allowance that dividend tax can be raised by any government. There could be any number of changes they might consider, but just to take an example, if they equalised dividend tax with income tax, someone making £5,000 in a year in dividends who pays basic rate tax on it all would pay £506 more than they currently would, and someone paying higher rate tax on it all would pay £281 more.
Stamp duty
The Conservatives have pledged to make the stamp duty holiday permanent for first time buyers on the first £425,000 of the property value. This is worth up to £6,250 compared to what they’d pay if the temporary holiday ends as scheduled. We know from previous tax holidays that this risks pushing prices up, unwinding the saving.”
