UK general election: What will a Labour government mean for your personal finances?

A Labour government has the keys to 10 Downing Street and control of the House of Commons for the first time since 2010, with party leader Sir Keir Starmer becoming the UK’s new prime minister.

But what does a Labour government mean for your money?

With the aim to grow the economy and “keep taxes, inflation and mortgages as low as possible,” Starmer’s Labour manifesto places an emphasis on wealth creation. To fulfil those plans, Labour may have to make changes that could affect taxes, allowances, and various investment schemes and rules.

Doing so may prove challenging with the pledges made in the manifesto. Leading think tank, the Institute for Government, claim Labour’s spending plans appear to exceed the amount of anticipated new revenue, and the Institute for Fiscal Studies stated “how it will square the circle in government we do not know.”¹

 Although the manifesto is not legally binding, it offers the best indication of what Labour’s plans for government are. Here we highlight what the pledges could mean for your personal finances and the potential impact of a Labour government on financial markets.

Pensions

Ahead of launching its manifesto, Labour announced that it will drop plans to reintroduce the lifetime allowance, a cap on how much people are allowed to save into their pensions before paying tax.

Importantly, Labour has committed to upholding the pensions triple lock, which ensures that the state pension will continue to increase each year in line with the highest of three factors: wage growth, inflation, or a minimum of 2.5 percent. This policy is designed to protect the purchasing power of retirees and ensure they are able to maintain a stable standard of living in retirement.

Labour has also previously stated that it will undertake a review of the pensions landscape to consider what further steps are needed to improve pension outcomes. However, further clarity on the scope of this review and the challenges they are looking to address is not yet available.

Inheritance tax

Inheritance tax has been widely discussed in recent months and was a noticeable absentee from the Labour manifesto. It contained no comments on the future of inheritance tax rates or reliefs (such as Business Relief and Agricultural Property Relief).

VAT

The Labour manifesto confirms that it intends to introduce VAT on private school fees and will end business rates relief for the schools, with such measures estimated to raise around £1.5bn for the government. The VAT is not expected to be imposed until at least 2025, according to incoming Chancellor Rachel Reeves.

The delay until 2025 provides families with additional time to consider their options and improve their planning. Families typically have a finite number of financial planning levers that can be pulled in order to meet additional expenditure, namely reducing other expenditure, increasing earnings, targeting higher returns (with the additional risk that comes with this), looking to borrow and gifting from relatives.

Income tax

Whilst Labour has pledged not to increase taxes on working people (including income tax at the basic, higher and additional rates) this does not preclude utilising fiscal drag to increase income tax revenues. Fiscal drag occurs when inflation and income growth push taxpayers into higher tax brackets, which already remain frozen until at least 2028. This policy results in higher taxes for affected individuals, even though the tax rates themselves have not changed.

One area to watch could be taxes on dividend income. These have not been mentioned and may be outside the scope of the pledge as a non-working source of income with its own income tax rates.

Moreover, Labour has pledged to reform the taxation of carried interest, which is a share of profits from a private equity, venture capital or hedge fund. The manifesto does not set out exactly how Labour would close the carried interest ‘loophole’, but the intent is clear, stating, “private equity is the only industry where performance-related pay is treated as capital gains. Labour will close this loophole”².

Capital gains tax (CGT)

The Labour manifesto did not specifically mention CGT rates, and the party’s senior figures, including leader Sir Keir Starmer, have said that they have no plans to reform these rates—with the exception of their proposed policy on carried interest. That said, future increases have not been ruled out entirely.

What Sir Keir has ruled out is the idea of applying CGT on individuals’ main residences, which are currently exempt from CGT.

One point to note is that a leaked dossier from a select group of Labour MPs called the ‘Tribune’ group, reportedly includes a proposal to align CGT rates with income tax rates. This would likely increase headline CGT rates with the top rate of income tax currently set at 45%. However, Labour has stated that “none of this is Labour policy”³ and the document has been rejected.

What history can tell us (looking back over the last half a century) is that previous Labour governments have not looked to increase the headline rates of CGT during office, as the chart below demonstrates.

Changes in CGT rates per UK government

National Insurance contributions

Labour supported the Conservatives’ cuts to National Insurance in the 2024 Spring Budget, and its manifesto outlines a commitment not to raise current rates. However, Labour may utilise fiscal drag with tax rates already being frozen until 2028.

Interestingly, the Conservatives pledged to abolish the main rate of National Insurance paid by the self-employed by 2029, but there has been no evidence to suggest Labour will follow this path.

The Labour manifesto also doesn’t rule out extending the scope of National Insurance to apply to all sources of income and to working pensioners (as suggested in the Tribune dossier).

Non-domiciled rules

Although Labour supports most aspects of the Conservatives’ proposed replacement of the nondomiciled rules, there is a notable exception to trust planning where they have stated they will “end the use of offshore trusts to avoid inheritance tax so that everyone who makes their home here in the UK pays their taxes here”.

Some transitional provisions may not materialise, such as the 50 percent reduction in tax on non-UK income for the 2025/26 tax year. Whilst others may be introduced like encouraging UK investments and the remittance of non-UK income and gains to the UK.

Other planned changes look set to continue although the timing of their implementation may need to be adjusted in order to bolster both tax revenues and investment in the UK.

Stamp duty land tax (SDLT)

Labour has set out plans to increase the rate of SDLT paid by non-UK residents, from two percent to three percent. This would mean the top rate of SDLT applying to non-UK residents would increase from 17 percent to 18 percent.

Corporation tax

Labour has pledged to cap corporation tax at the current level of 25 percent and will act if tax changes in other countries pose a risk to the UK’s competitiveness.

The impact of a Labour government on financial markets

The principal mechanisms through which politics impact markets is via interest rate expectations. If policies are perceived to be inflationary then interest rate expectations will increase. This would be reflected in higher yields on UK government bonds, which would in turn be reflected in higher fixed-term mortgage intertest rates. As a consequence, the pound would increase in value.

So far, the new government has suggested it will not spend lavishly, however its proposed spending commitments don’t seem to be covered by their published plans for increasing tax income. Therefore, Labour either needs to raise more taxes than it has committed to, spend less than pledged, or borrow more (which would see market interest rates effectively increase). Another path involves surprisingly strong growth that increases tax revenues without driving up inflation. Whilst this would always be the preferred means of raising revenue, it is one few professional forecasters expect in this instance.

The immediate impact of a Labour government on financial markets has been apathy. Because the party was the clear favourite for such a long time, market interest rates and the pound effectively reflected the result weeks before it happened.

Markets will only react if something unexpected is announced. Most announcements that impact interest rates are made at budgets and governments have held the occasional emergency budget soon after taking power. Incoming Chancellor, Rachel Reeves has indicated that she will not do so. Instead, she could hold a budget in the autumn when convention dictates. We would then have a package of more concrete measures to indicate Labour’s spending and tax plans.

The road ahead

As the new government assumes office, investors and businesses should stay informed and vigilant about any changes in the areas of taxation and investment. While there is always a degree of uncertainty surrounding any political transition, individuals can take proactive steps to protect their personal finances by staying up to date on any proposed policy changes.

1. https://ifs.org.uk/articles/labour-party-manifesto-initial-response ↩︎
2. https://labour.org.uk/change/strong-foundations/ ↩︎
3. https://www.telegraph.co.uk/politics/2024/06/19/labour-tax-rises-manifesto-general-election-keir-starmer/ ↩︎

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Forecasts are not a reliable indicator of future performance. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin. co.uk. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. ® / TM Trademark(s) of Royal Bank of Canada. Used under licence.