From Brexit to Macron, the last year has been marked by political upheaval. And that’s without mentioning the new Prime Minister, Article 50 and Trump. It might be fair to say that around the world there is a feeling of political fatigue. Everything seems to have come at once.
Now Brits will take to the polls once again on 8 June, this time in a general election that was supposed to be all about Brexit, but in recent weeks the rhetoric has been shifting.
Whilst the Conservatives are ahead in the polls, the launch of the manifestos has seen Labour close that gap. The gap has also widened between Labour and the Liberal Democrats, with the Liberal Democrats position weakening slightly in recent weeks. But that could all still change.
With policies on immigration, social care and the NHS grabbing headlines, we thought it might be useful to pick apart the policies that could impact your wallet. From the amount you can take home, through to the taxes on your savings, this election could impact it all.
Income tax
Currently, each person can earn £11,500 tax-free. The amount you then pay on your income depends on how much you earn.
- Lower rate tax: Pay 20% tax on salaries up to £45,000
- Higher rate tax: Pay 40% tax on salaries up to £150,000
- Additional rate tax: Pay 45% tax on salaries over £150,000
Labour and the Conservatives plan to protect the lower rate of tax, keeping the band at 20% on salaries up to £45,000. However, May’s parliament would increase the personal income tax allowance to £12,500 and bump up the additional tax threshold to £50,000 by 2020.
Labour leader Jeremy Corbyn wants to lower the additional tax rate threshold to £80,000 and reintroduce the 50p rate from £123,000. The Liberal Democrats, led by Tim Farron, want to add 1% to every tax band, but keep the goal posts the same. This will increase the tax payments to 21%, 41% and 46%.
But how would this impact your take-home pay, and ultimately your ability to save? With the income tax plans those on the average UK salary of £28,213 would take home more at the end of the year with either a Liberal Democrat or Conservative government. Those on high, or additional rate wages would take home more from the Conservative changes, and would contribute more in taxes under Labour and Liberal Democrats.
The amount you take home at the end of a year impacts the amount you’re able to save. A good way to prepare for the future is to treat a pay rise, or tax break, as additional savings. Once you have the money behavioural economics suggests you’ll likely spend it, but if you plan to set anything extra to one side you’ll be able to build your savings pot more quickly.
National Insurance
If you’re earning an income and over the age of 16, chances are you’re paying national insurance. This pays for a number of benefits, including the NHS, state pension, and maternity and paternity allowance. How much you pay depends on whether you’re employed, self-employed and how much you earn.
- Employed – Class 1.
- £680-£3,750 a month – 12%
- Over £3,750 a month – 2%
- Self-employed – Class 2 or 4
- Class 2 – Profits over £6,025 a year. Pay £2.85 a week
- Class 4 – Profits between £8,164-£45,000. Pay 9%
– Profits above £45,000. Pay 2%
This framework could all change after the general election.
The Liberal Democrats are thinking of possible reform to tackle the NHS crisis. National Insurance could increase, but then the onus on the individual to pay for health or social care could reduce. The Liberal Democrats are also thinking about bringing the national insurance threshold in line with income tax at £11,500, from £8,160. This would have the impact of increasing take-home pay across all pay levels.
Whilst, the Conservatives want to ‘simplify the system’ for the self-employed and small businesses. Back in the Spring Budget, Chancellor Philip Hammond announced plans to raise the Class 4 NICS, although he later axed the proposals after being accused of breaking the 2015 Conservative manifesto. The 2017 manifesto has removed that promise so if the Conservatives were to increase the amount the self-employed have to pay out, this would impact their take-home pay whilst also increasing their access to the new State Pension.
Labour haven’t unveiled any plans to change National Insurance contributions.
Pensions
The triple lock on the state pension has been an area of debate in recent years. This is where the government would guarantee to increase the state pension each year by either 2.5%, inflation, or average earnings, whichever is higher. Both the Liberal Democrats and Labour have pledged to stick to the state pension triple lock.
The Conservatives would keep the triple lock until 2020, at which point they would switch to a double-lock pledge, where pensions rise each year by the higher of earnings or inflation.
The Liberal Democrats are also talking about raising the tax relief to basic rate taxpayers. Currently the pension system works a little like income tax relief on anything you contribute to a pension. That means basic rate taxpayers receive 20% on anything contributed to a pension, whilst higher rate taxpayers receive 40%.
Varying policies when it comes to state pensions and pension tax relief highlight that these are areas that any future government might look at. In the UK, we have a pension deficit that’s creaking under the strain. Any examination of the current policies suggests that savers need to take responsibility for their own pension and take advantage of the current benefits available to them, there is a real chance that these benefits will get less generous in the future.
Savings
All manifestos were fairly light on plans to encourage savings. Labour and the Liberal Democrats want to reverse recent cuts to capital gains and inheritance tax; this would have the hangover effect of making the £20,000 annual ISA allowance all the more important. The Conservatives stated that they’d encourage people to use products that have already been designed.
Why do savings matter?
With politicians on the campaign trail talking about Brexit and the NHS it’s easy, and somewhat forgivable, to overlook the policies that could have a real impact on your future wealth. But with a shifting global political backdrop, and a real chance that the way Britain trades will have changed by the next election, there is the potential of economic volatility over the next five years.
The Bank of England base interest rate is at all-time lows, interest rates on cash savings accounts are negligible, the potential benefits from the government are shifting, in the cold light of day it is increasingly down to the individual to save for the future.
As the economic landscape changes, our personal finances need to be prepared. Savings need to be prioritised and good habits adopted to ensure that your personal finances are prepared not only for this election, but all the elections of the future.
