This is an audio transcript of the Money Clinic podcast episode: ‘What will the UK election mean for your money?’
Claer Barrett
With just over a week until the UK’s general election, Labour is promising to be the party of wealth creation. Yet its political rivals are whipping up fears of future tax raids on higher earners if they emerge victorious on the 4th of July. Taxes are the key battleground of this election campaign, but should we be braced to pay more? Prime Minister Rishi Sunak has been clear that, if re-elected, the Conservatives would cut taxes for workers with further reductions to national insurance.
Rishi Sunak voice clip
Well, I want to cut people’s taxes, right? That’s what I’m wanting to do for this country. We started already by a £900 tax cut for everyone in work. I want to go further if I win this election to give people financial security. Keir Starmer here all over the place, can’t rule out whacking everyone’s council tax up. I’m not going to do that. I want to cut people’s taxes at every stage of their life, and that’s the choice for everyone at this election.
Claer Barrett
Labour has pledged not to increase the current rates of income tax, national insurance or value added tax for working people, but people are still worried about future tax increases elsewhere.
Keir Starmer voice clip
Tax levels now, the highest for 70 years. So we can’t just go and pull the tax lever. You’ve got to show I understand it really matters that we can get people to say, I trust you on the economy. I trust you on defence. I trust you on the borders. What would we do if we were able to come into government? It’s a decade of national renewal.
Claer Barrett
How are fears of what might happen influencing people’s personal finance decisions in the run-up to polling day? And would a change of government be good news for the UK economy and investors?
[MUSIC PLAYING]
Welcome to Money Clinic, the weekly podcast about personal finance and investing from the Financial Times. I’m Claer Barrett, the FT’s consumer editor. For today’s episode, I’ve gathered a panel of experts to dig into those party manifestos and tell us what a new government could mean for our money. With me today is the FT’s deputy opinion editor and political animal, Miranda Green, who joins us down the line. Hi, Miranda.
Miranda Green
Hello, Claer. Thanks for having me.
Claer Barrett
And in the studio, I’m joined by Nimesh Shah, the tax expert and chief executive of advisory firm Blick Rothenberg.
Nimesh Shah
Hi, Claer.
Claer Barrett
Always a pleasure to have you in the studio, Nimesh. And last but not least, award-winning personal finance journalist Moira O’Neill, who writes an FT Weekend column in the Money section on Saturdays.
Moira O’Neill
Hello, Claer.
Claer Barrett
Now you’re all here. The main political parties have all published their manifestos, setting out the tax and spending plans for the next Parliament. And we’re going to jump straight into debating future tax cuts and tax rises. So, Nimesh, it feels fitting to start with you. Is it fair to say that whoever wins, we’re going to end up paying more tax?
Nimesh Shah
I think that’s really fair to say, Claer. The country is effectively broke, if I’m allowed to say that. Only just last week did we hear that debt as a percentage of GDP has crept up. So it’s almost 100 per cent again. And we’ve not seen those levels until just after Covid, when we had that 300bn spending pledge from this current Conservative government, and Rishi Sunak was the architect of that as well. So it had come down a bit. But any future government — and we think it’s going to be the Labour party that will come into power — they have also bound themselves by the fiscal rules that they want to bring that down as a percentage of GDP. So the Labour party has said that it’s not going to increase spending in terms of borrowing. And it’s also handcuffed itself largely to say that it’s not going to increase any of the Big Three taxes. Well, income tax, national insurance and VAT, which account for 75 per cent of the total tax take in the UK. So where does it really leave us? I always think that in an election situation you’re not going to have any bad news in your manifestos. But history does suggest if we go back over the last 20 years or so, that there will be some bad news in that first post-election Budget. Now, we think that’s going to be around September time, and I can see some bad news coming out from whichever party comes into power.
Claer Barrett
Mmm. I mean, even this week, the IFS very respected think-tank, said it would be considerably surprised if tax rises in other areas were not needed in the next Parliament, regardless of who wins the election. Now, Miranda, I’ll bring you in more to this conversation now. The Conservatives have been styling themselves as the party of lower taxes for a long time now. But will anyone really believe that tax cuts are really possible?
Miranda Green
Well, the short answer is no. As Nimesh has just outlined, it’s not a realistic expectation, but also in terms of the politics. That pledge lacks credibility because we know also from IFS research that this has been the most tax-raising Parliament almost of all time, certainly in sort of living memory. So I think they’ve got a real problem trying to get voters to believe that they would actually cut taxes should they, by some miracle, defy the opinion polls and win.
But you know, we’ve had some really interesting new research that we published in the FT this week on what voters in the blue wall, those previously secure Tory seats mostly across the south of England, think. And, you know, on redistribution, for example, 44 per cent of voters in the blue wall are in favour of redistribution of some sort, which is barely different from the 51 per cent in the red wall seats that the Labour party is trying to take back. So, you know, the mood isn’t really on the side of tax cuts, because the number one thing that the research shows is that people are worried about the kind of fabric of British infrastructure, you know, the rundown services in particular. So I think it’s not just, as Nimesh has outlined, that it’s an inevitable choice that there’ll be some uncomfortable tax rises. I think it’s actually it would be a risk. You always are spending political capital if you do that after an election, but it would actually go with the grain of what the public seems to want.
Claer Barrett
Exactly. Redistribution, as you say, they’re paying a higher rate of tax but getting better public services in return for it, whether that’s your child’s education or not having to pay for private dentistry, as we’ve mentioned on the previous Money Clinic. But Nimesh and Moira, of course, the fear. It’s the fear of future tax rises, that’s the biggest weapon that the Tories have to attack Labour with. Now, this is where the semantics come in. Labour has said it has no plans, in inverted commas, to raise other forms of taxes. The people believe that that’s possible. And what forms might these other future tax rises perhaps take?
Nimesh Shah
Well, what we know, Claer, is the Labour party have said in their manifesto trail this for some two or three years now being an opposition that they are going to, once and for all, abolish the non-dom rules. Now arguably Jeremy Hunt did that and stole a march back in the Spring Budget. They’re looking at increasing the tax rates for carried interest, although reported in the FT only last week, Rachel Reeves has said she may water down that policy as well. And . . .
Claer Barrett
And that’s a way of taxing hedge fund managers on the profits they make from big deals.
Nimesh Shah
That’s right. So rather than being taxed to capital gains tax at 28 per cent, they’re looking at possibly aligning that to income tax rates and national insurance up to 47 per cent. So almost a 20 per cent increase on the current rate afforded to hedge fund managers, PE funds around their tax treatment. And the much maligned VAT on private school fees. And lots of debate around, will this create more distortion in the school system? And will it actually raise as much money as everyone is saying around £2bn? Will it raise more as well? But those are the things that we know as well as some corporate increases around windfall tax, et cetera. Now that adds up doing a bit of quick maths, around 18bn. But that’s not where they’re going to get the most money from. And also interestingly, if the Conservatives pull off a miracle and do remain in power, the big revenue raiser here is frozen allowances.
Claer Barrett
So rewind a little bit, Nimesh. The frozen tax thresholds. Just give us your quick one-minute explainer on this.
Nimesh Shah
Yes, Claer. So over the last few years, again, another Rishi Sunak policy here was to freeze our personal tax thresholds at their current levels. And this is going to run until 2028. Now what’s happening is that all those thresholds are remaining the same. They’re not going to go up until 2028. And this is what we call stealth taxes or fiscal drag. And what it’s meaning is that more people are getting dragged into paying higher rates of income tax. And with wage inflation the way it’s been, actually the way inflation has been over the last few years under the cost of living crisis, more and more people are getting dragged into paying higher rates of income tax.
And now Jeremy Hunt has said that those are going to run until 2028. Labour hasn’t said one way or the other, but the inference is that they’re going to keep that policy. They may even increase it beyond 2028, because it’s been a real revenue raiser for this government. And the estimates from the OBR is that it’s going to raise over 100bn over the next five years. And once you’ve counted the cut in national insurance, the government is still better off by around 60, 70bn in total over that five-year period. So I can’t see that policy being reversed in any way. But that’s only where the cash seems to be coming from.
Claer Barrett
And Moira, one of the pieces of research I’ve seen on this and the effect of frozen thresholds is that around 3mn extra people stand to be higher-rate taxpayers by the end of the next Parliament, as Nimesh was saying, pretty much whoever wins. What kind of effect does being a higher-rate taxpayer have on our personal finances, for good and for bad?
Moira O’Neill
It immediately makes you figure out how to avoid paying it and using the wonderful tax wrappers that we have. So using the Isa allowances that we currently have on the pension, on your allowance that we currently have, and storing your money away in these wrappers, that means you don’t have to pay the income tax and capital gains tax that you might otherwise pay as your investments grow and produce income. But the problem I see is that if there was further fiddling with those allowances, because at the moment they’re pretty generous, you can put £20,000 into an Isa every year. Hardly anyone really does that.
Claer Barrett
But you could.
Moira O’Neill
You could put £60,000 into a pension. Sort of amazingly generous as well.
Claer Barrett
And that could bring down the overall rate of income tax that you end up paying. Very useful for anybody who’s on £100,000 tax threshold.
Moira O’Neill
Yes. But pensions could be a big revenue riser as well. So everybody seems to worry about this who speak to, that potentially could they cap the tax-free lump sum that you got. Could they cap the amount you can put into a pension? Could they introduce a flat rate of income tax relief on pensions, which would not be so generous for wealthy people putting money into the pension? It never happened.
Claer Barrett
But would be better for basic rate tax.
Moira O’Neill
Definitely. Yes.
Claer Barrett
Who’d make pensions with them make much more financial sense for them to save into, which is probably why Labour styling itself very much as the party of working people think that that could be a lever to potentially pull in the future. Here’s what Keir Starmer had to say when challenged on that definition of working people on LBC radio last week.
Keir Starmer voice clip
We’re not, the person I have in my mind, Nick, when I say working people is people who earn a living, rely on our services and don’t really have the ability to write a cheque when they get into trouble. So the sort of people I’m meeting pretty well every day now.
Claer Barrett
OK, so experts, working people, what do you have to say on Sir Keir Starmer’s comments there?
Miranda Green
Yes. Well, so it’s very interesting this because, you know, listening to Moira list all the ways in which they could find some avenues to raise more tax without putting up those three main taxes that they’ve pledged not to touch, is really interesting because I cast my mind back to the Gordon Brown era, when, as chancellor, he was pretty adept at finding what became known as stealth taxes. So I think there is a bit of a kind of parlour game going on at the moment to try and find what could be the Rachel Reeves stealth taxes. And clearly their careful repetition of this phrase that they are the party of working people and they don’t want to tax working people more has sort of set off little alarms and set hairs running because you’re then sort of encouraged to find the, you know, the segments of the population who maybe could be classified as not as working, and that includes pensioners.
But I think it is a good exercise because they are going to have to find some extra money somewhere, even over and above that fiscal drag revenue that you’ve talked about. Of course, what they maintain is that none of the tax rises will really be the main source of extra revenue, because what they’re going to do is have this miraculous growth plan, and the economy will start to recover quickly. And then getting growth into the economy will mean a much healthier tax take. And, you know, funding for public services to avoid these kind of up to £20bn per department cuts that we’ve been warned about will suddenly appear. And I can’t help, one, as a citizen hoping that this does come to pass, of course, but two, as a somewhat sceptical observer, you know, I think that they’ve just found a kind of another magic money tree, really just saying, well, the proceeds of growth will pay for everything without any pain. You know, there will be pain because you can’t get economic growth that fast.
Claer Barrett
We’ll come back to that slightly later in the podcast. But before we move on — was there anything that surprised either of you two about the working people comments that you wanted to add?
Nimesh Shah
Well, I suppose, Claer, lots has been read into it. The bit that has running in my circles has been around capital gains tax, and whether that is going to be aligned to income tax.
Claer Barrett
And this CGT, just to break it down a bit for listeners who’ve maybe never had to pay it before because it is something that affects older, wealthier people, it’s basically a tax on profits. If you’ve made a profit on an investment, but it’s not within the Isa or a pension, as Moira was saying, so it doesn’t have that tax-shielding wrapper around it, then capital gains tax could be due. But also if you’ve bought a property that’s not your main home, either a second or third home, holiday home or buy-to-let, different rates of capital gains tax apply to the property. But nevertheless, the Tories, as you say, they’ve put it up and the fear is that Labour could come back to this.
Nimesh Shah
Yeah. That’s right. Investors are fearful that CGT rates could go up under a Labour government and some of the estimates around there saying that it could raise up to 16bn if you did align income tax CGT. So, I absolutely agree with Moira. People should be maxing out their Isas and pensions as much as they can. And what we’re seeing, again in some circles, is around where the national insurance could be applied to savings income, investment income, dividends, even rental profits as well. And also then removing, if we go back to this working people definition, could national insurance actually be extended to those that are earning more than the higher rates and more than just over £50,000, and remove what is currently a 2 per cent national insurance for those higher earners and actually have a flat national insurance rate, which is currently 8 per cent. Would that run all the way up to unlimited earnings? And again, that could raise quite significant sums of money. It would be quite draconian. You could have then an effective rate of tax at the top rate, well over 50 per cent when you combine income tax and national insurance.
Moira O’Neill
Sure. For me, it feels like they will have to do something around inheritance tax. And that is a big worry for some of the readers and advisers I speak to. At the moment, we’ve got this very strange anomaly whereby pensions, which are there to provide for retirement income, are actually used for inheritance tax planning, and you get financial advisers around the country telling people, don’t dip into your pension because you could pass it on to kids instead, which is a really weird anomaly in the system. And then there’s also this thing about Aim shares. So shares. This is on the Alternative Investment Market, which are exempt from inheritance tax, and therefore you get some quick wins of 80-year-olds putting all their money into Aim shares just so they can pass it on to their kids. And I think that Labour has said it would look at that as well. So these could be some of the stealthier ways that taxes are raised without affecting the so-called working people.
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Claer Barrett
Before we move on, any tax policy details that surprised you in any of the political manifestos? Moira?
Moira O’Neill
Well, mine is the lack of the mention of the British or UK Isa in the Conservative manifesto, because that was the major announcement back in March. And we all got either very excited or not very excited about it. And then it’s not being mentioned. So whether that’s going to happen, who knows?
Claer Barrett
Miranda, were there any tax promises in any of the other manifestos that caught your eye?
Miranda Green
Well, actually, what I thought was interesting about some of the other parties in the election really sort of going for it and saying this is going to take money to correct the running down of public services and also sort of some rights and wrongs. So I was kind of struck by the fact that the Lib Dems are going for free social care. That’s very expensive, potentially. The Green party has the most dramatic tax and spend policies of any. If you are a very hawkish voter wanting massive redistribution and massive investment in the public services, that’s the manifesto for you and it makes, you know, this background of the minor parties is quite a contrast with the Labour and Tory plans, which are, if you put them alongside each other, both equally cautious, really. And then, of course, you’ve got the Reform party not even calling it a manifesto, but saying that it’s a contract, and possibly if the IFS and others are to be believed, not worth the paper is written on in terms of a contract, but designed to benefit higher earners. Actually, I believe.
Claer Barrett
Before we move on, there was one aspect of the Reform party’s contract/manifesto, whatever you want to call it, that did interest me. The front-loading of child benefit they’ve talked about, to recognise that not everybody wants to work while they’re bringing up a baby, very aimed at mothers, I have to say, rather than parents, which is where my hackles start to rise. But nevertheless, given the cost of childcare in those early years where you can’t get your children into the state-funded school system, what does the panel think about that one?
Moira O’Neill
So for me, child benefit is not there to pay for childcare. Child benefit is there to help you with the day-to-day costs of being a parent and helping your kids. And front-loading for me and I’ve got teenagers, they probably need as much benefit from the child benefit as the younger kids. I mean, I’ve seen a teenager empty the fridge very, very rapidly after school and multiple times during the week. So parents do need it at both ends of parenting.
Claer Barrett
And Miranda, childcare, a big, big issue at this election, certainly one that many of our listeners are very concerned about.
Miranda Green
Yeah, it’s a huge part of, I mean, I would say it was an infrastructure issue. Because often when we talk about infrastructure, we talk about, you know, our inability to build a decent railway in this country. But actually the human infrastructure is as important when you say, and, you know, childcare and social care for the elderly and, you know, disabled children, et cetera, it’s actually a huge part of whether people can function in the economy. And, you know, the childcare proposals are quite different, I think, in their emphasis, because even though the Tory party has put a lot of, I mean, a record amount of spending into its own new childcare set-up, it was very much designed to be get the mothers back into the workforce. So it was a sort of economic measure and it helped disproportionately, you know, middle-class families or those already in paid work and who were doing OK, but as a subsidy. Whereas the Labour plans are much more to do with, you know, the under-fives who really, really would benefit from early-years education in terms of their lifetime outcomes. So it’s a really different political emphasis there in the childcare plans.
Claer Barrett
And I’m sure a subject for a future podcast. But let’s move on now, Moira, to what people have been doing with their money ahead of the vote. Now, you’re close to many financial planners and advisers. What kind of decisions are people contemplating now before the country goes to the polls?
Moira O’Neill
Well, I’ve seen people wanting to put more into pensions, wanting to stash more away in Isas in case those allowances are cut or capped. And then also, I’ve seen some talk of people even taking their pension earlier than they might have done just to get the tax-free lump sum. So 25 per cent of your pension when you retire can be taken tax-free, which is a massive perk of pensions. And there’s a sort of worry among some people that that might be a target for future government.
Claer Barrett
Yeah. So it’s already limited at just over £250,000. So you’d need £1mn pension to hit the limit. But yes, fears as you say that that could come down further. Nimesh, what kind of things are you seeing in your world? As a financial adviser to, you know, people and businesses, your company?
Nimesh Shah
Yeah, I suppose three things that have been flavours of the last month since the election was called. One is on VAT on private school fees and lots of families out there saying that they’re going to pre-pay big lump sums of school fees in advance, and a bit of debate around whether Labour may introduce some retrospective form of VAT. If you do do that, the change may not apply until September of 2025, giving some lucky people still that exemption if their child is almost at the end of their private schooling. The other things around CGT, this comes up a lot around any election time that people are thinking about crystallising big capital gains before the election itself, or certainly before the end of the tax year.
Claer Barrett
I mean, one thing we know about capital gains tax is no party is going to reduce the rate. So if you’ve got an investment that you’ve made a profit on, whether it’s a property or some shares that you want to sell, then I guess now’s the time.
Nimesh Shah
Now might be a good time to do it, even though the valuation may be slightly lower as markets have been a bit tempered. And then the most extreme example has been leaving the country. People are quite fearful that taxes are going to go up, as we said at the very start, and especially non-doms, who feel they’ve been very hard done by and thinking about more sunnier climates such as Italy or the Caribbean or Singapore or the UAE, where there are much more favourable tax systems than our own. Some do fear that the writing is on the wall for higher rates of taxation in the UK. And so thinking about different locations, which has been an easier thing to do in the world of remote working.
Claer Barrett
And there’s a link in the show notes today with an FT article that appeared this weekend discussing just that. As is often the case, the 3,000 comments underneath the article are just as interesting, I think, as the article itself.
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Finally, let’s talk about some good things that could come out of this election. Miranda, what are the chances of the economy responding positively to a change of government?
Miranda Green
Well, actually, I think I am relatively optimistic just because the whole machinery of government has been treading water for such a long time in anticipation of an election having to be, you know, called by the end of this year. And so actually, almost just in terms of a kind of like a mood of let’s start again, let’s reverse some of the worst decisions and think about, you know, what to do next.
Claer Barrett
Of course, the big challenge for whoever wins the election is how to reconcile the problem of putting more money into public services, which are crying out for investment without having to increase taxes and make the population really squirm at the effects. So economic growth, Miranda. This could be the answer to the future government’s prayers.
Miranda Green
Well, so it looks pretty bleak in terms of squaring the circle on those promises on no tax rises, as we’ve discussed today. But clearly with the Tony Blair Institute sort of whispering in their ear the whole time, Keir Starmer’s shadow cabinet is adamant that they think the way to get more money into Britain’s public services is to kick-start economic growth. Then you get a better tax take and hey presto. But of course, it isn’t that simple at all, is it Claer? So there is a slight worry, but unless they can find some ways to, you know, deliver that increased tax take quite quickly, they will have to be falling back on tax rises. Because, you know, economic growth case unproven. And it’s not a magic money tree.
Claer Barrett
No. This is true. But sticking with the attempt at optimism, Moira, I mean Labour have really wooed the big business world ahead of the polls. I mean, just look at the array of business leaders of stature who are coming out in support of them. But what sectors of the economy do you think could really respond positively to a Labour victory?
Moira O’Neill
Well, the big one is housing because Labour’s made some very strong pledges there. It’s argued current planning isn’t working. It’s failed to build on (inaudible). And also it’s gone strong on affordable housing as well. So you know there are obviously this is . . . could be positive for the UK’s housebuilders and also Britain’s builders’ merchants as well.
Claer Barrett
So the housebuilders, infrastructure in general, could be some benefits to the more domestically focused companies, the FTSE 250, smaller ones, Aim stocks you mentioned earlier. But of course anyone who’s investing with a short-term view, as we talk about on this show, there’s much more potential, isn’t there, Moira, for things to come.
Moira O’Neill
Definitely. And I would caveat any sector tip with the advice that you should never let your investment dog chase the policy squirrel, and make sure it fits into a diversified portfolio. Whatever decisions you make around what the government may or may not do for the economy.
Claer Barrett
Certainly. And there’s a link in today’s show notes to a big article I wrote for the FT a couple of weeks ago looking at the case for and against investing in UK-listed companies that may be further interest. Nimesh, moving down the scale a little bit, your firm advises a lot of entrepreneurs, as we were saying. Now, of course they’re all about growth. That’s what small companies do. They grow into bigger ones. What insights from them can you share with us?
Nimesh Shah
I suppose business owners, entrepreneurs really want certainty in all aspects of a business environment in the UK, something that they’ve not necessarily had, but especially when it comes to my subject matter around taxes, over the last 15, 20 years. There’s been lots of yo-yoing on the business tax environment on compliance requirements, how to do business effectively in the UK, especially from an inbound and business perspective, and going outbound as well internationally, which can be a real catalyst for growth. So I would really like to see if I’m being optimistic for our entrepreneurial clients certainty around taxes in particular. And I have hope that Rachel Reeves could be that tax-reforming chancellor, set a real clear tax strategy. If she is listening on day one, I look, ideally I only have one fiscal event if I was being really revolutionary.
Claer Barrett
So one big budget.
Nimesh Shah
One big budget at the start of the new Parliament, which sets the agenda for the next five years, and don’t have this constant political yo-yoing. That would be something that I personally would like to see. It would obviously save on some FT print on a Budget day. But I do hold out some hope that Rachel Reeves will look at our very complicated, cluttered tax system, and just provide that guidance on what a road map may look like, especially if you’ve got a big Labour majority and have a mandate, maybe for the next at least two Parliaments, that she has the opportunity to go and do that. So please go, Rachel, and give us some simplification and certainty.
Claer Barrett
Well, thank you, experts, so much for joining us in the studio today. Only one thing remains to be seen, which is, of course, who wins when we go to the polls on the 4th of July. FT will be all over UK election coverage. If you don’t subscribe to the paper, don’t forget there’s the FT Edit app, free to sign up and then after six months, 99p a month. But you get the best selection of our top eight stories of the day in election period and beyond. Miranda, Nimesh, Noira, thank you for talking to us on Money Clinic today and frankly, for making politics sound or less taxing.
Moira O’Neill
Thank you, Claer.
Nimesh Shah
Thank you very much.
Claer Barrett
See you in the studio soon.
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That’s it for Money Clinic this week with me, Claer Barrett. And we hope you found this episode useful. If you did, spread the word and leave us a review. We’re always looking to chat with people about their money issues for the show. So if you’re interested in being part of a future episode and are looking for some expert money advice, then email us. Our address is [email protected]. You can also follow me on Instagram and TikTok. I’m @ClaerB. I’ll be particularly active over the general election period.
Money Clinic was produced by Tamara Kormornick. The sound design was by Breen Turner and our editor is Manuela Saragosa. You heard original tunes this week by Metaphor Music, and Cheryl Brumley is the FT’s global head of audio. And finally, our usual disclaimer: the Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you will need to find an independent financial adviser. That’s all the small print for now. See you back here next week. Goodbye.
