This July, the Labour Party won a historic victory in the general election, ending 14 years of Conservative leadership.
Soon after, chancellor Rachel Reeves revealed that there is a £22 billion “black hole” in the nation’s finances.
Quite how Keir Starmer’s government plans to plug this hole remains unclear. Yet, there has been much speculation about what reforms Labour may make as they seek to raise revenue to fund their policy commitments.
Read on to learn more about these potential tax and pension changes and how they could affect your finances. The new government’s first budget is scheduled for 30 October, when we might learn more about any proposed changes.
1. Make pensions liable for Inheritance Tax
Labour’s “Change” manifesto made only one mention of Inheritance Tax (IHT) – a pledge to “end the use of offshore trusts to avoid IHT”.
However, Professional Paraplanner has reported on speculation that the new government could seek to bring pension funds into a person’s estate for IHT purposes.
Currently, pensions are usually exempt from IHT, making them a tax-efficient way to pass on wealth to your beneficiaries.
If the government were to include pensions in your taxable estate when you die, this could potentially increase the amount of IHT your loved ones pay on their inheritance.
Of course, we won’t know what Labour’s plans for reform are until the current pensions review is concluded.
According to the party’s manifesto, the review – launched in July by Rachel Reeves – aims to “improve pensions outcomes and increase investment in UK markets”.
This is likely to include a review of the major initiatives Labour has inherited from the outgoing Conservative government, such as the 2017 auto-enrolment reforms and consolidation of multiple small pension pots.
Making pensions liable for IHT is one reform that Labour might consider as a means of raising funds to help plug the £22 billion “black hole” in the nation’s finances.
2. Align Capital Gains Tax rates with Income Tax rates
Significant changes have already been made to Capital Gains Tax (CGT) in recent years.
The previous Conservative government reduced the Annual Exempt Amount for CGT for the past three consecutive years – from £12,300 in the 2022/23 tax year, to £6,000 in 2023/24 and finally to £3,000 in 2024/25.
While the only specific mention of CGT in the Labour manifesto refers to changes for managers working in the private equity industry, Sky News has reported that bringing CGT rates in line with Income Tax bands could raise between £8 and £16 billion for the Treasury.
Currently, Income Tax and CGT rates stand as follows:
So, aligning CGT rates with Income Tax could result in a significant increase in the amount of CGT you could be liable for when disposing of certain assets.
For example, such a move might see an additional-rate taxpayer paying 45% tax on any capital gains, rather than the 20% currently payable.
3. Introduce a flat rate of tax relief on pensions
Currently, you can usually receive tax relief at your marginal rate of Income Tax on pension contributions that don’t exceed your Annual Allowance.
The Annual Allowance is the maximum amount you can contribute to your pension in a single tax year without facing an additional tax charge.
In 2024/25, it stands at £60,000 or 100% of your earnings, whichever is lower. However, this may be lower if your income exceeds certain thresholds, or you have already flexibly accessed your pension.
Higher- and additional-rate taxpayers can claim 40% and 45% relief on any pension contributions that fall within their Annual Allowance – the basic rate of 20% plus an additional 20% or 25% respectively.
However, the Institute for Fiscal Studies (IFS) has suggested that this “overly generous” pension tax relief should be reformed. In place of the current system, they recommend a flat rate of 30% tax relief for all pension contributions, regardless of a person’s income.
In 2016, chancellor Rachel Reeves made a similar case for a flat rate on tax relief for pensions. While the Financial Times has reported that Reeves has “no plans” to revive these reforms, she has refused to categorically rule out such a move.
Switching to a flat rate might be welcomed by basic-rate taxpayers who could receive a boost to their contributions. However, if you’re a higher- or additional-rate taxpayer, this change would likely mean that you receive considerably less tax relief on your pension contributions than you do now.
For example, if you’re a higher-rate taxpayer, a £1,000 contribution to your pension would currently “cost” you £600 (as you receive 40% tax relief). Were Labour to introduce a 30% flat rate, your £1,000 contribution would cost you £700.
Any changes are unlikely to happen immediately
It’s impossible to predict exactly how Labour will amend current tax and pension rules.
The pensions review is currently underway and may not conclude before Rachel Reeves’ first Budget on 30 October.
So, any changes are unlikely to be confirmed until after these dates and they may not take effect until the 2025/26 tax year.
If any reforms are introduced, we can help you understand how these changes might affect you and adapt your financial plans to ensure you continue progressing towards your goals.
If you’d like help reviewing your financial plan to ensure you’re managing your wealth as tax-efficiently as possible, we can help.
To find out more, please get in touch. Email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
