Last week, a soggy Rishi Sunak set the date for our election. For UK investors, the date of the most important election has been known for a long time, (5th November), but we don’t get a vote in that one (the Biden v Trump rematch).
Whilst the US election is likely to be more significant for the investments we hold, we shouldn’t underestimate the influence of the UK poll.
In particular, our election is bound to have influence, directly, on the amount of tax we pay, including the amount of tax we pay on our investment returns. It will also have a less direct impact on UK centric investments, like the shares of smaller UK companies, fixed interest stock issued in Pound Sterling (gilts and corporate bonds), and property investments. Indirectly, it may have an impact on interest rates (depending on how much the new government intends to borrow) and the strength of the Pound (this is particularly significant for fixed interest funds which tend to hedge out currency risk which can be unhelpful if the Pound weakens).
I am one of a minority who isn’t convinced that the next election will be the foregone conclusion of a Labour majority, predicted by so many. A hung parliament isn’t out of the question, and I’m old enough to remember Major’s surprise victory in 1992.
What does seem likely is that, regardless of who wins, if we do get an outright winner, tax rises will be on the cards. Like everyone else, the government is finding it more expensive to borrow money (on 1st May, it borrowed £3.75 billion over 10 years, at a cost of 4.37% per year; in April 2022, it was only paying 1.93% to borrow money over 10 years). Liz Truss gave her successors a demonstration of the importance of the gilts market. We don’t have many assets which we can sell, so the only alternative to borrowing is to raise tax (unless public services are to be cut back further). I imagine that both of the main parties will have spending plans, so they will need to raise money somehow.
The Institute of Fiscal Studies tells us that the most effective way to raise tax is to increase income tax, National Insurance and VAT. These taxes raise a lot of money, are easy to collect, and the money comes in quickly. Beyond these taxes, if I was advising the next Chancellor on how to raise more tax, I would advise them to focus on inheritance tax and pensions, and, maybe, a windfall tax on banks (which appear to have done rather well as a result of interest rates).
With regard to pensions, Labour has stated its intention to reintroduce the Lifetime Allowance (this was a cap on how much you could take out of your pension without a tax charge). The Lifetime Allowance was abolished in April this year (although HMRC hasn’t finished correcting the errors in the regulations it wrote yet!), and the general consensus is that it will be hard to replace it. The Lifetime Allowance was extremely complex, and came with unintended consequences (e.g. doctors retiring early), so I wonder whether a new government might decide to try to find something better. Unlike a rise in income tax, NI or VAT, it is unlikely that a new Chancellor will be able to announce that the Lifetime Allowance will reinstated from midnight on the date of their first budget.
There has been little mention of the fact that higher and additional rate taxpayers get more tax relief than everybody else on their pensions. Some people even get tax relief of 60% on their pensions and some get even more help to make pension contributions from the government than this (you might need to have a young child to get the most from your pension contributions though!). Whilst there has been little talk of pension tax relief so far, if you are planning to make a contribution, it might not be a bad idea to do so before the next budget, particularly if you can secure tax relief at 40% or more.
There has been a fair amount of discussion recently about how to persuade investors to invest in British companies. The last budget announced the start of a consultation about a British ISA, and there have been proposals about how the vast sums of money in pension funds can be used to support British companies. At the same time, some high profile companies have either left or have said that they are thinking about leaving the London Stock Exchange. A new government may choose a carrot or stick approach, but it seems likely that a City-friendly administration might encourage us to keep our money in the UK.
What we do know is that your collective voice will have a financial impact. The turnout amongst older voters has been consistently higher than amongst younger voters for the last few elections. Is it a coincidence that the Triple Lock for the State Pension is now sacrosanct, whilst students now pay interest at 7.8%? Voting in July might be the best way of affecting politicians’ promises in the elections that follow in future years.
Philip Wise | philip@sussexretirement.co.uk
Managing Director and Chartered Financial Planner
