Newsletter: July 2024

As you know the Labour party won a huge victory in the UK general election. The result was widely anticipated by pollsters, economists, and other experts.  The new government has plenty of issues to contend with and a lot of pre-election manifesto promises to keep.  The King’s speech of course, set out their direction of travel for the next five years and we wanted to let you know some of the salient points which might affect your investment decisions.

They do have some very laudable aims and aspirations such as extra funding for the NHS and lifting millions of children out of poverty, but they will face some significant challenges in how these and other aims are achieved.

Capital gains tax (CGT)

While Sir Keir Starmer and chancellor Rachel Reeves have said they have “no plans” to increase CGT rates, they have not completely ruled it out either.  The annual CGT allowance has been reduced over recent years and now stands at just £3,000. Labour have done little to dispel fears of further changes to the CGT regime.

Currently, basic-rate taxpayers face either a 10% or 18% tax charge and higher-rate taxpayers face either a 20% or 24% tax charge, but this could rise, potentially even being brought in-line with income tax rates.  This could raise some revenue for the Chancellor but equally stifle investment in assets which might suffer this taxation.

In effect, Labour’s win in the general election and potentially increasing CGT rates, would serve as a double whammy with those higher rates of tax and lower exempt allowances considerably increasing the capital gains tax take.

I would remind you that that whether CGT is raised or not, us helping you to make the most of tax-efficient ISA and Pension plans, which protect your interest, dividends or capital gains, remains a good strategy.

Income tax

Although Labour pledged no increases to income tax rates in its manifesto it is continuing with the previous governments back door policy of raising tax revenues by keeping the freeze to income tax thresholds.  These are known as stealth taxes.

Labour have opted not to reverse that policy. Had income tax bands not been frozen, the personal allowance would be just over £15,000 this year and the higher-rate threshold would sit at just over £60,000.  As it is, people are paying more tax than they otherwise would have thanks to the ongoing freeze.

The pension triple-lock

Labour has committed to the triple-lock system currently in place, which was no doubt “sensible” to win votes but is also “fraught with problems”.

The triple lock, which guarantees that the state pension increases annually by the highest of CPI inflation, average earnings growth, or a baseline of 2.5%, has served to safeguard against poverty for retirees.  However, it presents a significant challenge that no party of any colour, has been willing to fully address.

Pensioners will continue to get meaningful increases to their income, with the full new state pension set to hit almost £12,000 next year.  If maintained, retirees could get a state pension of £13,250 by 2030.

While pensioners will continue to get decent increases to their state pension they may face more tax, particularly as the personal allowance is frozen and Labour has not committed to shield the state pension from income tax. In other words, the country will pay higher state pension income to pensioners with one hand but take a chunk of it back with the other hand via income tax.

Pensions lifetime allowance (LTA)

The new government backtracked on its pledge to bring back the pension’s lifetime allowance during the election campaign, ultimately discounting it from the party’s manifesto.

Those people who might have found themselves with significant tax charges had this been brought back in, can breathe a sigh of relief, as a reintroduction may have created huge unintended consequences.

The LTA was removed to mitigate the issues in the public sector with senior staff and consultants in the NHS finding themselves suffering the unfortunate side effects of working extra hours (to clear waiting lists) and therefore building up pensions which then suffered even more tax.

Pensions review

The new government has pledged to undertake a pensions review, which focusses heavily on either encouraging or making more people save more money in their pensions.

There are also big problems with pension savers building up multiple pots over their working life, which makes pensions unnecessarily complex and confusing.  At Symphony, we work hard to consolidate multiple pensions into one manageable pot, where appropriate to do so and the government is looking to make this standard practise for everyone, everywhere.

Improvements proposed in the pension review may include adjusting minimum contributions and the age threshold for eligibility.  Also, the government is looking to allow pension companies more flexibility in choosing investment in UK businesses, this is a positive outcome following of leaving Europe as before, they weren’t allowed to favour UK investments.  There are billions of £’s available in UK pension funds which now might be made available to drive economic growth and deliver you the pension holder, a positive return.

ISAs

The UK ISA policy mooted by former Conservative chancellor Jeremy Hunt may well remain in place under Labour, with investors able to save up to £5,000 in the additional tax wrapper – providing it is invested in domestic businesses.  The fine detail of this has yet to be published but rest assured we will help you with these new plans if and when, launched.

That said the new government has supported ISA simplification in the past, with savers encouraged to make more use of the current stocks and shares ISA rules, which may make the implementation of another option less necessary.

Private school fees

Labour has confirmed its plans to bring in VAT and end business rate relief for these schools.

It is widely expected this will significantly increase the cost of private schooling.  It’s expected that schools will absorb some of these cost increases, so there’s no clear sense about how much fees will increase by.  Labour wants to use the revenue from this policy to drive upwards the number of Teachers employed in the public sector and they estimate around 6,500 extra staff might be employed.

Based on the average day-school fee of £18,064 a year per pupil, a family with two children would see their annual costs rise by just over £7,000 a year if the full 20% cost increase was passed on.

While some parents will opt out of private school altogether in favour of the state system, others will absorb the price hike, make cuts to their budget elsewhere, or ask family for help with the higher fees.

The economy

Labour’s fiscal policy has been close to the Conservatives when it comes to economic growth and fiscal spending.

Labour will be looking to generate some substantial economic growth over the short term (leaving taxes to one side).  So, it is likely that the fiscal rules will shift at some over the next parliament.

Markets have generally slowed down expectations of the pace of rate cuts as data had continued to signal stronger than expected inflation.  However, the Fed (US Federal Reserve) has indicated that inflation is coming down. Despite pushing back expected rate cuts, equity markets have continued to push towards all-time highs mainly driven by US technology companies and the ongoing excitement surrounding artificial intelligence (AI). 

Although it was expected that the European Central Bank (ECB) would lower interest rates in June as it in fact did, it is worth noting interest rate cutting in individual countries is also underway, with central banks in Sweden, Switzerland and Canada all cutting rates recently.  Perhaps here in the UK we will see a late summer rate cut which will be welcomed by businesses everywhere… except the banks who earn well from higher rates!

A stable horizon?

President Biden has announced he will no longer campaign for re-election and has endorsed Kamala Harris. This coupled with the recent assassination attempt on Trump will no doubt shape the direction of the US presidential elections.

As global elections conclude and governments take office to formulate policies, this should help settle the tone, and provide clarity around the evolving political landscape in the second half of the year.  That said, the US election is not until November, so a little uncertainty will remain.

In the post-pandemic world, markets are increasingly influenced by fiscal policies. Consequently, we remain watchful of political risks while advising you on your portfolios.  We continue to monitor these developments closely, but our focus is on advising you to invest with well researched, quality companies that can withstand political turbulence and deliver solid returns over the medium to long term. 

Returns over the last twelve months have been good, which shows, when times are difficult and returns aren’t as good as you might want, sitting tight and holding your nerve pays off.

The future is looking brighter, and it now feels as if markets are operating under ‘business as usual’ principles rather than jerking from one catastrophe to another.