So, there we have it: the UK general election will be held on Thursday, July 4th. The opinion polls currently favour a Labour government, but there is everything to play for. This brings us to the topic of finances and which issues will influence the result of the general election. It is safe to say there is a lot to consider!
Leading financial topics
When we look at the number of financial issues which will need to be addressed during campaigning, Tory stalwart Michael Heseltine put it succinctly when he said:-
“Ultimately, people are only bothered about how a new government will increase the money in their pocket.“
While all of these topics are interlinked to some extent, we will examine them in isolation.
Cost of living crisis
The cost-of-living crisis has been ongoing for some time, and while wages are now starting to rise a little quicker than inflation, there is much ground to make up. The government’s tax income as a percentage of GDP is at the highest level since the 1940s, and household budgets have been under pressure for some time. There are signs that this pressure is reducing, but it may take some time for households across the UK to feel any significant benefit.
Economic growth
While the UK entered a technical recession towards the end of 2023, the economic rebound at the start of 2024 has surprised many. First-quarter growth came in at 0.6%, which was above the 0.4% forecast by the Bank of England and a recent Reuters poll. This was the fastest growth since 2021 and prompted the IMF to increase economic growth forecasts for 2024 from 0.5% to 0.7%, with growth expectations for 2025 currently standing at 1.5%.
Interest rates
Even though the impact of reduced interest rates will take some time to filter into household budgets and living expenses, a reduction in June (as suggested by the Bank of England) would be timely for the government’s election campaign. The IMF recently updated expectations for UK interest rates, suggesting they could fall as low as 4.5% this year and 3.5% by the end of 2025. A reduction would help the broader UK economy, with investment and mortgage markets likely to grab the headlines.
Inflation
Looking back, it seems a long time since we talked about double-digit inflation, even if it has had a lasting impact on household budgets. Fast-forward to the April inflation data. There was disappointment that the figure came in at 2.3% as opposed to expectations of 2.1%. To put this into context, the last time we experienced a lower rate of inflation was back in July 2021.
Unfortunately, the impact of that relatively short period of double-digit inflation will have consequences for the longer term. It has rebased the cost of living with a knock-on effect to the level of income required to enjoy a comfortable lifestyle in retirement.
Stock markets
Investment markets are an interesting area when we see a change of government from a so-called capitalist to a socialist viewpoint. While historically, markets have reacted less favourably to an incoming Labour government, during the last 50 years or so, the difference in performance has been negligible. The general conception, or should that be a misconception, that markets fear a Labour government is as outdated as it is untrue. We only need to look at the current tax revenue level as a percentage of GDP, the highest since the 1940s, to undo some of the stereotypical myths.
ISAs
ISAs and their predecessors, Personal Equity Plans, have proven a long-term success for many investors. Over the years, the annual allowance has increased gradually and now stands at £20,000, with talk of a new British ISA and a further £5000 allowance. Often overlooked and underappreciated, recent reductions in capital gains and dividend income tax allowances have highlighted the significant benefits of tax-efficient investment vehicles such as ISAs. A useful means of saving, complimentary to pension and retirement plans, the long-term benefits are well documented.
Pensions
Pensions are a controversial topic that will be front and centre in the general election. Keir Starmer is already suggesting there will be a review and a potential rollback on recent changes if he gets the keys to No. 10. The introduction of workplace pensions and the popularity of personal pensions mean that both parties will need to tread carefully so as not to upset the electorate. So, rather than looking forward and contemplating future changes, it’s important to work with the regulations today and make the most of them.
Inheritance tax
The freezing of the inheritance tax allowance in 2009 has significantly increased government taxation in this area. The freeze on the £325,000 threshold has been extended further from an initial date of 2026 to 2028. Considering the average UK home is worth more than £280,000, additional assets, investments, and savings will take many people above and beyond the threshold, facing 40% taxation on the surplus.
There have been rumours and counter-rumours regarding inheritance tax in recent times, but the only thing we know for certain is that government tax income from this area is increasing.
Income tax
As the devolved governments look to place their mark on legislation, we have seen areas such as Scotland moving away from the traditional UK income tax thresholds/structure, causing some confusion. More people will also feel the impact of fiscal drag, with the freezing of income tax allowances, which will see the majority of the workforce paying more tax in the coming years. For those who are in danger of moving into the higher tax band, there is the option of salary sacrifice, boosting your pension while managing income tax liabilities.
Summary
It will be interesting to see the headline topics during the general election and campaigning on the virtual streets of the UK. Whether considering investment markets, the cost-of-living crisis, inflation, or interest rates, the main focus is on personal wealth in the short, medium, and long term.
While there are many different opinions, forecasting potential changes by the next government is pure conjecture at the moment. Amid the expressions of concern about a potential change in government, it’s important to remember that the only certainty on tax rates and allowances is what we see today.
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Scott Kingsley
