The Labour Party has unveiled its political manifesto with Jeremy Corbyn making several promises for pensions and tax. We analyse the proposals to see what it means for financial planning.
Mr Corbyn said the Labour Party intends to keep the state pension retirement age at 66, following speculation that it could rise in the next few years.
Royal London pension specialist Helen Morrissey told Portfolio Adviser: “Labour has issued an ambitious series of pension commitments in its manifesto. Some such as the pledge to improve access to pensions for those on low incomes and the self-employed should be congratulated.
However, others, such as the pledge to leave the state pension age at 66 and to compensate the 1950s women are likely to cost many billions of pounds and with no money set aside to meet these commitments it will be difficult to see how they can be funded.”
AJ Bell senior analyst Tom Selby says: “A quirk in the state pension system means people who retire to certain countries overseas do not benefit from inflation increases.
The reason for this is that a reciprocal social security arrangement needs to be agreed with the country the person is retiring to. Successive governments preferring to focus state pension cash on people living and working in the UK.
There is also a Brexit element to this. At the moment UK nationals who retire to the EU automatically receive state pension uprating.
While the current government has committed to continuing with this arrangement over the short-term, there are as yet no guarantees beyond the next few years. Presuming Labour’s pledge extends to UK nationals in all countries around the world, this could push the cost up considerably if we eventually leave the EU.”
But not much was said about the treatment on pension tax by the current opposition party.
Cameron adds: “Noticeable by its absence is any prominent indication that Labour would undertake a fundamental reform of the tax treatment of pensions. Any major reform would require extensive and detailed consideration and may not be seen as a priority at this time.
“Labour’s commitment to look to widen access for the low paid and self-employed to auto enrolment schemes is welcome and likely to be mirrored by all parties.”
In other taxation areas, however, Labour said it will “crackdown on tax avoidance and evasion”, as well as reform the tax relief system.
It plans to reverse the inheritance tax (IHT) cuts brought in by former chancellor George Osborne, since it will “most likely benefit high income and wealthier households”.
AJ Bell personal finance analyst Laura Suter adds: “Labour previously talked about plans to scrap inheritance tax in its current form and instead give everyone a gifting allowance of £125,000 during their lifetime – with anything above this taxed at income tax rates.
“However, these plans were curiously absent from the manifesto, with the party just saying it would ‘reverse cuts to inheritance tax’, so scrapping the residence nil rate band.
“While a complex tax that’s little understood, scrapping it will be a blow to those who wouldn’t count themselves as rich but have gained property wealth through rising property prices.”
Capital gains tax
There will be a drastic change to capital gains tax (CGT) under a Labour government.
Labour will tax capital gains at the same level as income tax and abolish the lower income tax rate for dividend income.
“It is also a potential inefficiency and source of avoidance that income tax and capital gains tax have separate annual tax-exempt allowances, allowing the wealthy to separate their income into different forms in order to benefit from double tax relief.
With a separate dividend tax rate some people with significant income from different sources can benefit from three separate tax-free allowances and there is evidence that business owners declare income in different ways purposely to take advantage of different rates and allowances.”
Income tax would increase for those earning over £80,000 a year, Corbyn says.
Sticking with their 2017 manifesto pledges, Labour will increase the number of people paying the 45% income tax rate, cutting the threshold from the current £150,000 down to £80,000, and introducing a new 50% rate for those earning more than £125,000. The move will cost taxpayers £5.4bn.
The party will also bring the tax on gains from investments in line with income tax, echoing similar pledges by the Green Party. The pledge to bring capital gains and dividends into the income tax regime will raise £14bn for the government.
The move to crack down on dividends will hit business owners who pay themselves through dividends rather than income, but also investors, with the capital gains tax allowance being slashed from £12,000 to £1,000 – which will cost up to £4,400 a year for those earning £50,000 or more.