There is less than six weeks until the general election on July 4, so it is time to get your finances in order. If Labour win, it could mean big changes to pensions and private school fees. If the Conservatives keep control, expect more changes to tax as it considers phasing out national insurance altogether.
We look at how you can prepare:
Tax
What could happen
The amount of tax we pay has increased under the Conservatives as basic and higher rate income tax thresholds have been frozen since 2022. Analysts say that the freeze has more than offset the benefit of the cuts in national insurance, which has gone from 12 per cent last year to 8 per cent now.
Laura Suter from the wealth manager AJ Bell said that tax was likely to be a “key battleground”. “The Conservatives will surely point to cuts to national insurance as evidence of their commitment to reducing the tax burden, while Labour will argue that frozen tax thresholds mean we’re paying more tax via stealth,” she said.
The Conservatives have pledged to introduce a new £5,000 Isa allowance for UK shares.
Labour has vowed not to raise income tax or corporation tax rates on company profits. It also plans to tax the overseas income of British residents who claim non-dom status.
Advertisement
What to do
Take advantage of tax breaks in case they change. If you usually wait until the end of the tax year to use up your £20,000 Isa allowance, consider using it now instead.
You can make £500 of dividend income from shares before you pay tax (down from £5,000 six years ago), while the capital gains tax allowance which you pay on profits from investments outside an Isa or on a second property is £3,000 (down from £12,300 in 2022-23).
• Where should I save once I’ve used my £20,000 Isa allowance?
Pensions
What could happen
The government has abolished the lifetime allowance — the £1.073 million limit on how much money you could save into a pension over your lifetime before being hit by hefty tax charges. However, Labour previously said it would reintroduce the limit if it were elected.
But experts say this should not put you off from saving into your pension. “Labour made a knee-jerk pledge to reintroduce the lifetime allowance the day after it was abolished. It remains to be seen whether they stick to that,” said Jason Hollands from the wealth management firm Evelyn Partners.
Advertisement
In the past, transitional arrangements were made to protect savers caught out by changes to the lifetime allowance. In 2016 it fell from £1.25 million to £1 million and savers who were likely to be affected could apply to keep the higher limit.
The state pension could be a bargaining chip for either party. Both have pledged to protect the triple lock, which guarantees that the payment will increase by average wage growth, inflation, or 2.5 per cent a year — whichever is highest.
What to do
Make the most of your annual pension allowance, experts say. You can pay up to £60,000 a year into a pension tax-free, but cannot pay in more than you earn and very high earners can lose some of that allowance.
You can carry forward unused allowances from the previous three tax years. “Allowances are on a use it or lose it basis. Making the most of them while they are there is always a good idea,” said Tom Selby from AJ Bell.
School fees
What could happen
Labour’s plans to apply 20 per cent VAT to private school fees could add thousands of pounds to parents’ bills. Schools could be legally required to put VAT on fees, but may decide to cut bills for parents in other ways, by reclaiming VAT on other costs, or by cutting fees.
Advertisement
Average fees for day schools are £6,021 a term, but could rise to £7,225 with VAT. Boarding fees are an average of £14,153 a term, and would be £16,983 with VAT on top.
What to do
It’s possible to pay for school fees in advance, but there are risks. Many schools offer a discount on fees for future years if you pay a lump sum upfront. However, refunds are only given in exceptional circumstances, so you’d be likely to lose money if you needed to switch schools.
Even so, there is no guarantee you will avoid VAT if Labour allows HMRC to apply the tax retrospectively. Check your contract to see if you are liable for VAT with pay-in-advance deals.
Grandparents can help to shoulder additional costs and mitigate a future inheritance tax bill at the same time. You can gift up to £3,000 a year tax-free, and larger financial gifts are exempt as long as you live for seven years after making them.
• Our best ready-made personal pensions
Advertisement
Investing
What could happen
In the hours after the election announcement, the FTSE 100, which hit multiple record highs in recent months, dropped 0.5 per cent. The FTSE 250, which is generally seen as more focused on domestic UK stocks, dipped 0.2 per cent.
The election is unlikely to rock the stock market much in the coming weeks. Markets hate uncertainty more than anything and for now the result of the vote seems pretty certain.
Historically, the UK stock market has performed better under a Conservative government. The FTSE all-share has returned 4.9 per cent a year on average under the Tories and 3.9 per cent a year under Labour, according to analysis by Bowmore Asset Management.
What to do
Investors should not panic and should not try to guess the market. The best thing is to stick to your long-term plan and keep investing small, regular amounts.
Advertisement
Ben Conway from the wealth manager Hawksmoor expects the UK market to rise regardless of the election because, at the moment, several cheap British businesses are the target of takeover bids from overseas bidders.
The UK-listed miner Anglo American has rejected multiple bids from Australian rival BHP, while on Thursday shares in the investment platform Hargreaves Lansdown rose 10 per cent after it rejected a bid from a group of private equity firms.
Small and medium British businesses could be best placed to profit, said Conway. His investment picks are the Artemis UK Select fund for larger firms, Aberforth Smaller Companies and Odyssean investment trust.
Are you taking advantage of current allowances before the election? Share your story below
