With the announcement of a general election to be held on 4th July 2024, many people’s thoughts have turned to the question of how a change in government might affect them. Whilst a lot of what is to come is unknown as the two big parties have not yet published their election manifestos, a certain amount can be gleaned from comments they have already made.
General election timeline
| 23 – 24 May | ‘Wash up’ period in parliament for outstanding legislation. 16 bills will either be dropped or pushed through on a consensus basis. The list includes the relatively short Finance (No 2) Bill 2024 which was at the report stage in the House of Commons when the election was called. Parliament prorogued. |
| 30 May | Parliament dissolved ahead of 25 day election campaign cycle |
| 5 – 16 June | Expected publication of party manifestos |
| 4 July | General election |
Regardless of who wins, government debt is at its highest level as a percentage of GDP since 1960 [1], and the overall level of tax is the highest level since World War 2 [2]. There is little room for additional spending, no matter who governs. This is due in part to how the government tax revenue behaves, and how expenditure changes. Large amounts of government expenditure such as the State Pension, state benefits, and public sector salaries and pensions, are either directly or indirectly linked to inflation. This means that when inflation increases, so do the costs of providing these payments.
Conversely, government revenue to fund that expenditure is based on taxes and borrowing, and taxes can only be a percentage of the ongoing ‘value’ that the nation generates each year. This means that if growth in the economy is sluggish and inflation is high, the government is forced to increase expenditure whilst having limited means to cover that expenditure without either raising taxes or borrowing more. This is the situation we find ourselves in, and will be the same whatever the makeup of the next government.
What might an incoming government look to?
It is virtually certain that taxes are going to rise further, so what might an incoming government look to for more revenue?
Labour has announced that it will add VAT to private school fees from “day one” of being in power [3], and extend the tax on non-domiciled individuals. Beyond this, there are a number of other possible options – all of these are hypothetical at the moment, but have some degree of previous comment around them. In any case, the next Chancellor must deliver a Spending Review this year, which will establish priorities for the next three years.
- The new government could reform or restrict pension tax relief. This would be a big source of revenue for any government, as the UK currently spends around £50 billion per year on this[4]. This would definitely save money up front, but would reduce the average size of investors pension pots over time, since they would be getting less tax relief overall.
- The new government could look to implement further taxes on the oil and gas industry, with an extension of the current windfall tax. Oil and gas companies pay a special rate of 75% Corporation Tax on their profits, and Shadow Chancellor Rachel Reeves has proposed extending this to 78%, and keep this in place until 2029. [5]
- There could be reform of Inheritance Tax. The existing IHT nil rate band – the amount of assets a person can pass on before paying the tax – is frozen at £325,000 until 2028, and will probably remain so under any new government. This has not increased since 2009, so this will mean more people are drawn into paying this tax via fiscal drag.
- Although officially there are no plans to change the rates of Income Tax or Capital Gains Tax, these are taxes that have varied a lot over the decades, and may change again as circumstances dictate. Capital Gains Tax was first introduced under then-Chancellor James Callaghan in 1965 (prior to which gains were not taxed at all). Rates were aligned with Income Tax by Conservative Chancellor Lawson in 1988, and this continued until 2008, when they were reduced to 18% by Gordon Brown. Re-aligning CGT with Income Tax rates would raise a further £12 billion [6]
All of this is very much unknown for the moment, and some of it will only become clear with time, after the actual election itself.
A general election and your financial planning
Whilst we cannot affect the decisions that governments will make, we can always plan to make sure that our own financial planning is as optimised as it can be. If you would like to speak to one of our financial planners, please get in touch.
[1] Statista – Public sector net debt expressed as a percentage of GDP in the UK from 1900/01 to 2028/29 – 2024
[2] Independent – UK tax burden remains set for post-war record high, despite cuts – Nov 2023
[3] The Telegraph – General election latest news: Lord Frost banned from standing as Tory MP – May 2024
[4] Pension Age – Cost of pensions tax relief passes £50bn mark for first time – 2023
[5] Politico – Oil and gas companies lash out at Labour’s new windfall tax plans – Feb 2024
[6] IPPR – Chancellor’s first step to raising tax income from wealth leaves potential £50billion untapped, IPPR finds – November 2022
