What a new Labour government could mean for the economy and our wealth
Implications of a new Labour Government
As Labour secures the landslide victory many expected it to, Britain enters a fresh political era after 14 years of Conservative leadership. For the economy, it’s been a rocky ride: growth and productivity has stuttered following the extraordinary events of the Global Financial Crisis, Brexit, COVID, and more recently, a searing inflationary storm and the folly of former prime minister Liz Truss’ disastrous ‘mini-budget’ of September 2022.
It seems to have left Brits simmering with concerns over the trajectory of their wealth. It’s why during the election campaign, Labour pounced on the economy as a key selling point – it was mentioned 83 times in its manifesto1 - and have styled themselves as the ‘party of wealth creation’. As such, numerous policies are locked and loaded.
Tom Selby, director of public policy at investing platform AJ Bell, remarks: “Starmer and Reeves have been leaving a long and winding trail of breadcrumbs on their intentions for the country since January when they published their plan for financial services, with subsequent announcements on pensions and personal taxation being heavily previewed throughout this election campaign”.
Of course, policy curveballs are always possible: you only need to look to Labour’s surprise announcement following their 1997 election victory, when newly appointed Chancellor Gordon Brown announced he was handing control of setting interest rates to the Bank of England2 – stunning the City and Westminster.
Nonetheless, here’s what we know from current announcements and may expect from Labour as they take the reins.
The approach to the economy should be consistent
Sir Keir has been keen to project an image of steady economic competency, especially in the wake of Liz Truss and Kwasi Kwarteng’s disastrous fiscal policies. As such, he has promised to be tough on spending and vowed that the country’s debt as a percentage of GDP – economic output – must fall by five years’ time.
In addition, he has said that he’s capping corporation tax at 25%, and will shake-up the business rates system as he attempts to help fledgling businesses and battle unfairness that has been benefitting big online operators.
Much needed investment will come from a new £7.3bn National Wealth Fund, which aims to attract private money and be used for new infrastructure projects, green energy systems, and support for higher growth sectors.
Income tax bands will stay put
Labour has repeatedly claimed it won’t raise taxes, but zero chatter has surfaced on defrosting income tax bands, which Tory policy had frozen until 2028 - meaning taxes remain rising by stealth.
Laura Suter, director of personal finance at AJ Bell, explains: “The freeze on income tax thresholds means that millions more people will be dragged into higher rates of tax. The OBR estimates3 that by 2028-29 the deep freeze on tax thresholds will see almost 4 million extra taxpayers, 2.7 million more moved to the higher rate of income tax, and another 600,000 paying the additional rate. On top of that, many households will pay thousands more in income tax than they would have done had thresholds been indexed in line with inflation.”
Pensions: the lifetime allowance will remain scrapped
The Tory scrapping of the pension lifetime allowance was broadly cheered as necessary and sensible by public sector defined benefit (DB) schemes, financial advisers and the pensions industry. But since, a threat has loomed that Labour may seek to reinstate it, which, as Jason Hollands of Evelyn Partners, points out: “had been causing a lot of uncertainty, and putting some savers’ plans into paralysis”.
As it stands, it seems Labour won’t be bringing it back, as Tom Selby explains: “Labour deserves credit for recognising this and dropping plans to reintroduce the limit, a move which would have risked hitting senior public servants, including doctors, with huge tax bills, added unwelcome complexity to the pensions tax system and unfairly penalised those who enjoy strong investment growth”.
He continues: “Labour’s commitment to stability should give savers confidence to plan for the future. This move also supports wider efforts to boost investing, including in UK companies.”
Down the line, Starmer has said he will carry out a wide-ranging review of the pensions landscape, aiming to encourage more investing and improve outcomes for investors. Jason Hollands adds that he hopes “reforms will ensure that workplace pension schemes take advantage of consolidation and scale, to deliver better returns for UK savers and greater productive investment for UK PLC”.
Pensions: the ‘triple-lock’ stays
Though the long-term sustainability of the triple-lock promise for state pension rises is questionable, Labour did not use the issue as a political football during the election, and has kept generous triple-lock rises in place.
It does, however, raise an odd quandary, as Jason Hollands outlines: “the state pension - at its full rate of £11,5024 a year – will remain on a rapid collision course with the personal allowance, the amount of income which can be earned tax-free each year. This is currently frozen at £12,5705 until 2028, a timeline Labour has said it will stick to. This raises the prospect that pensioners will soon be taxed on their state pension income, and the OBR has forecast that the state pension will overtake the personal allowance level by 20276”.
He adds that this shines “a harsh light both on the affordability of the triple lock and on the stealth tax rises effected by the long-term freeze in personal tax thresholds”. Could the triple-lock be on the chopping block down the line?
VAT is coming for private schools
One of Labour’s manifesto promises has been to remove tax exemptions from private school fees, which the Institute for Fiscal Studies (IFS) has forecast will raise between £1.3bn - £1.5bn7 per year in tax receipts.
In the 23/24 academic year, private school fees rose by 8%8 on average from the previous year due to wage pressure and rising pension costs. The proposed introduction of VAT is therefore likely to have an enormous impact on private schools, as Jason Hollands outlines: “A 20 per cent hike would be a final deal-breaker for many thousands of families. A recent survey suggested that as many as 42%9 of the total number of children currently in fee-paying places could be taken out of their schools and into the state system over the next five years”.
Radical ISA simplification is on the cards
While not in the manifesto, Labour has previously backed plans for ISA simplification in its ‘plan for financial services’10. ISA complexities arise from the fact that, following the planned introduction of the ‘British ISA’, there would be six variations for retail investors to choose from –creating confusion and further apathy to investing.
Tom Selby explains: “Research we’ve conducted shows that the ISA ‘brand’ is widely recognised by the UK public. But once people are asked to identify the various different types of ISA available, knowledge levels plummet”.
As a result, a number of UK investing platforms are calling for the different variations to merged into a single ISA that incorporates all of the benefits of each, with the ISA contribution limit rising to £25,000: adding the proposed £5,000 contribution limit for the British ISA to the £20,000 limit for the current five.
[1] https://labour.org.uk/change/
[2]https://www.bankofengland.co.uk/events/2017/september/20-years-on#:~:text=Since%20we%20were%20granted%20operational,such%20as%20banks%20and%20insurers
[3] https://obr.uk/docs/dlm_uploads/E03057758_OBR_EFO-March-2024_Web-AccessibleFinal.pdf
[4] https://www.gov.uk/new-state-pension/what-youll-get
[5] https://www.gov.uk/government/publications/the-personal-allowance-and-basic-rate-limit-for-income-tax-and-certain-national-insurance-contributions-nics-thresholds-from-6-april-2026-to-5-apr/income-tax-personal-allowance-and-the-basic-rate-limit-and-certain-national-insurance-contributions-thresholds-from-6-april-2026-to-5-april-2028
[6] https://obr.uk/efo/economic-and-fiscal-outlook-november-2023/#:~:text=By%202028%2D29%2C%20frozen%20thresholds,more%20paying%20the%20additional%20rate.
[7] https://ifs.org.uk/articles/labour-party-manifesto-initial-response
[8] https://ifs.org.uk/sites/default/files/2023-07/IFS-Report-R263-Tax-private-school-fees-and-state-school-spending.pdf
[9] Baines Cutler May 2024 poll of 30,000 parents of children at independent schools.
[10] https://labour.org.uk/wp-content/uploads/2024/01/Financing-Growth.pdf