However, this doesn’t rule out changes to the way pensions are taxed, such as subjecting state pension income to tax, changing/reducing pensions tax relief, or tax-free lump sums that can be withdrawn, or removing exemptions from IHT for pension savings. (The Conservatives promised to shield the state pension from income tax.) While Mrs Reeves had previously said she would reintroduce the lifetime allowance, media reports suggest Labour has backed away from this, and although not ruled out, it wasn’t mentioned in the manifesto.
Over past decades, the UK built up a range of generous tax incentives for savings, from pensions to ISAs. In recent years the generosity has cooled somewhat. Labour may continue to turn the dial, especially as part of the vague “pension reform” mentioned in its manifesto.
Changing to a flat rate of tax relief on pensions has been discussed in the past. Because tax relief on pensions accrues at your marginal income tax rate, the wealthiest receive the largest savings. This may spur Labour to reform pensions toward a single, flat tax rate on pensions (say 20%, 25% or 30%) regardless of income band. A flat rate of tax would be much harder for employers and savers to administer and would lead to double-taxation for higher-paid workers.
This is because at a flat rate of, say 30%, higher-rate taxpayers would pay 10% on income deposited in their pensions (because their marginal rate is 40%) and then another 20% (if they are basic rate taxpayers at retirement) when they withdraw them years down the line. This is complicated and would take time to roll out, so it’s not something we would expect early in a Labour term. But it’s something to watch out for.
Up to £60,000 a year can be deposited before tax into pensions, whether auto-enrolment schemes at work or self-invested personal pensions (SIPPs). However, that is much lower than the £255,000 limit in place before the global financial crisis. Changes since 2016/17 have eroded the generosity further for the very wealthy. Today, the annual limit for tax-free payments into a pension is tapered by £1 for every £2 earned over £260,000. The standard annual allowance could be cut even after only being recently increased by the Conservatives, bringing more cash into HMRC’s net.
Labour has allegedly ditched its plan to reinstate the recently scrapped £1,073,000 standard lifetime allowance for pension pots, above which extra tax was levied, particularly on higher earners. This is good news; however, it’s important to remember that there are still limits on what lump sums can be taken tax-free from your pension. And they look pretty similar.
There is a new ‘lump sum allowance’ of £268,275. This figure is 25% of the old lifetime allowance, and limits your total tax-free pensions payouts at death to £1,073,100. The maximum amount you can transfer overseas without penalty is capped at, you guessed it, £1,073,100. Although it’s unlikely that the old system would be reintroduced, there remains a cohort of savers where larger lump sums are available and reducing the cap on lump sums could raise additional revenue from those with “broader shoulders”.
The ISA is another savings device that has grown increasingly generous in recent years. It was introduced by New Labour in 1999, replacing an earlier savings scheme with a more flexible alternative. However, one report by the Resolution Foundation, a thinktank that seeks to improve the living standards of low- to middle-income families, has argued that HMRC could save £1 billion each year by capping ISA savings at £100,000. Everything over that would be taxed as normal.
Yet the number of people it would affect would be very small — there are just 1.5 million people living in families with more than £100,000 of ISA savings per adult. If this were to come into force, it would make sense for people to reassess what to keep in their ISA and determine whether it made sense to move it to another tax wrapper.
In this year’s Spring Budget, Conservative Chancellor Jeremy Hunt promised an extra £5,000 of ISA allowance strictly for investment in UK assets (the ‘British ISA’), albeit without an implementation date. This hasn’t appeared in either main party’s manifesto, so its future is uncertain. The “pension reforms” promised in Labour’s manifesto may include keeping this idea alive as a way to boost investment in the UK. It may even ratchet up even further this quid pro quo of tax savings for investing in UK assets, perhaps by reducing the general ISA annual allowance and adding to the allowance for British ISAs.
That would greatly reduce the choice available to investors and could introduce a large bias to sterling investments in portfolios, which could reduce returns relative to the risk taken on. This bias would create additional risks and require investors to make difficult assessments about whether tax efficiency offsets a balanced portfolio comprising the whole global market. Or Labour could leave the plan by the wayside.
Tax-incentivised investments such as Venture Capital Trusts, the Enterprise Investment Scheme and Business Relief investments are due to come under the microscope in 2025. They offer a range of generous relief from Income Tax, CGT and IHT, yet Mrs Reeves broadly favours these investment vehicles for the effect they have on UK business growth and entrepreneurship. We will have to wait and see what the Budget brings on this front.
