Our personal taxes have once again become a political battleground, with the two men currently most likely to become the next Prime Minister offering startlingly different plans.
On the one hand, Boris Johnson - the firm favourite in the Conservative party leadership race - has pledged this morning to raise the earnings threshold for higher-rate 40% tax from £50,000 to £80,000. That would hand a tax cut to around 3 million people currently regarded as higher earners, and would cost the exchequer £9.6bn a year.
Standing in direct opposition to that is Jeremy Corbyn, the Labour leader whose party is currently leading the Conservatives in the opinion polls. In a tax policy that is the mirror-but-opposite of Mr Johnson’s, Mr Corbyn wants to make those earning upwards of £80,000 pay more. He would do this by lowering the 45% tax-rate from its current £150,000 level to £80,000, and then introduce a new highest 50% rate on those earning £123,000 or more.
For those affected by the policies, the potential difference in outcome could amount to thousands of pounds a year in extra - or reduced - tax.
Now, this all comes with the large caveat that it’s still very uncertain that either man will ever become Prime Minister. Labour may lead the Tories in the polls but Mr Corbyn himself polls very badly among voters. He needs first a general election to happen and then to win a majority, which polls suggest is unlikely.
Mr Johnson, meanwhile has to navigate a two-stage leadership election in which he must first convince his sceptical fellow MPs before the (probably easier) task of securing a win among Tory members. Even then he would inherit Theresa May’s shaky Commons position where there is no Conservative majority. His Brexit plans may even mean he is forced into a general election almost immediately.
There is little investors can do to anticipate political outcomes. If either of these plans were to be enacted it would require a thorough review of their personal financial affairs to, at the least, assess the impact and perhaps to prompt action.
It is always important to invest in a tax-efficient way, which means making use of ISAs and pensions where tax that may otherwise have been due will not apply. Should Mr Johnson’s plan to lower income tax materialise, those affected may find they have more take home pay at their disposal, while there could be an impact on the tax relief that applies to their pension contributions.
Alternatively, those hit by Mr Corbyn’s higher tax rates may find pension contributions, which currently benefit from tax-relief, become more attractive.
None of this is to pre-empt the correct course of action in each scenario - only to reinforce that individuals should stand ready to review their finances, and the way they invest, in response to changes in the tax system.
There have been significant changes to the savings regime in recent years with income tax, tax on property investment, pension rules and dividend taxes all moving about and requiring responses from individuals.
For many, a professional adviser will be the correct course. For pension planning, The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.
Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge
There's also more general guidance here.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment on ISAs and pensions depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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