Election update: Conservatives form a government; how will it affect your finances?
What a night it was!
The “shock” exit poll has been proved broadly correct, and we now know that the Conservatives will try to form the next government, albeit with support from the Democratic Unionist Party (DUP).
Now that has been confirmed, we can look forward, and ask: How will your personal finances be affected by the result?
When the Tories wrote their manifesto a few short weeks ago, they did so in the hope, and probable expectation, of an increased majority. The reality is very different, we can therefore expect some of the more controversial elements of their manifesto to perhaps be tempered a little.
But here’s our best guess:
All eyes will be on sterling and the stock markets over the next few days.
Both remained relatively stable in the wake of the result; the FTSE 100 even rose, owing to the large number of members who benefit from a weaker pound.
However, if sterling does weaken over the coming weeks, it could mean more inflation, as the cost of buying imports (such as good and cars) increases. This will mean the possibility of higher interest rates sooner rather than later, which could be good news for savers but bad news for borrowers.
Brexit: Full steam ahead?
In her speech after seeing the Queen, Theresa May made it clear that the Brexit timetable will remain unchanged.
Whether the ‘type’ of Brexit will change remains to be seen; without a working majority, the Prime Minister may be forced to soften her stance on certain issues.
Two measures announced in the Budget failed to make it on to the statute book, due simply to parliamentary time running out after the snap election was called.
The first was a cut in the dividend tax allowance. This would have seen shareholders; investors and business owners, have their tax-free allowance cut from £5,000 to £2,000 from April 2018.
The second was in relation to the Money Purchase Annual Allowance (MPAA).
The MPAA is the maximum people who have withdrawn money under the new ‘freedoms’ can continue to pay in to their pension and was set at £10,000. In his Budget, on 8th March, Philip Hammond announced that it would be cut to £4,000 from 6th April – giving those affected less than a month to plan for the change.
Whilst paying in to your pension after you have taken money out may seem an odd idea, there are many reasons why it might be the right thing to do. The change would have affected thousands of pensioners, including those who continue to work on a part-time basis, who have previously retired and subsequently returned to work or who have taken money from their pensions under the new ‘freedoms’ and continue to work.
However, the proposal never became law, leaving thousands of people in limbo, unsure as to how much they can legitimately pay in to their pension.
Over the coming weeks it will become clearer whether these two changes will be quietly discarded, or become law.
Income Tax and National Insurance
The future of both Income Tax and National Insurance is unknown.
In the run up to the election, Mr Hammond made an ill-fated attempt to increase the amount of National Insurance paid by the self-employed. Following a media backlash, a quick U-turn was executed.
The Conservative manifesto confirmed the existing commitment to raise the tax-free personal allowance, from £11,500 to £12,500 by 2020. The manifesto also pledged to raise the threshold for higher-rate taxpayers, to £50,000 by 2020.
Figures from AJ Bell show that these changes would make 24 million basic-rate taxpayers £33 a year better off, with higher-rate taxpayers saving £208. But, with no majority, and a reliance on other parties, the commitment to raise the higher-rate tax band could be at risk.
Many people also believe that the Chancellor could also revisit the level of National Insurance contributions paid by the self-employed. Again, without a majority, that has to be questionable too.
What will change with Corporation Tax?
The Conservative manifesto promised to cut Corporation Tax to 17% by 2020. The rate is currently 19% for all companies, irrespective of the profits they make.
A promise to review the business rates system has also been made, with the aim of more frequent reviews and lower rates for smaller businesses.
Value Added Tax (VAT)
The Conservative manifesto states: “We will not increase the level of Value Added Tax”, but we are unsure what impact a minority government might have on such a statement.
The ‘triple lock’ currently guarantees that the State Pension will rise by whichever is the highest out of:
- Average earnings
- The rate of inflation as measured by the Consumer Price Index (CPI)
The Conservatives have committed to maintaining the ‘triple lock’ until 2020. After which point, the State Pension will rise in line with the higher of earnings or inflation; effectively a ‘double lock’, without the guaranteed 2.5% annual increase. This could be another policy proposal which could be altered; especially if inflation remains relatively high, which negates the cost of the 2.5% minimum increase.
The age at which we get our State Pension is already set to rise for both men and women, to 66 by 2020 and then to 67 between 2026 and 2028. Whilst the other main parties pledged to keep increases to a minimum, the Conservatives have committed to increasing it in line with life expectancy. So, expect to wait longer for your State Pension in the future.
Unlike those of the other major parties, the Conservative manifesto made no mention of relief for the so called ‘WASPI’ (Women Against State Pension Inequality) women affected by increases to their State Pension age.
Certain benefits that pensioners are currently entitled to, such as free bus passes and TV licenses will be kept. However, the Conservative manifesto stated that winter fuel payments, which are currently universal and worth between £100 and £300 each year, will be means tested in the future.
Again, with one eye on the next election, whenever that may come, the Conservatives may be tempted to row back on this change.
National Living Wage
The manifesto pledges to increase the National Living Wage, which applies for anyone aged 25 or over, from £7.50 to £8.75 by 2020.
This was one of the most controversial topics of the whole election campaign.
The Conservatives initially stated that in future, people would be expected to use their capital, including their home, to pay for the cost of care, until their assets fell below £100,000. This is actually a significant increase on the current level of approximately £23,000; however, that seemed to be overlooked in the heat of the campaign. They also, initially at least, ruled out a cap on the fees you can be expected to pay personally for care.
After being dubbed the ‘dementia tax’ a swift U-turn was performed and the Conservatives have now committed to a cap, and a consultation, on the level it would be set at.
If there’s one policy that may be taken straight back to the drawing board after the result, it’s the amount we all pay for our care in old age.
Keep Calm and Carry On?
There’s no doubt, it will take longer than usual for the dust to settle.
Policies and promises that were made during the campaign aren’t necessarily guaranteed to happen. So, for now, we’ll have to wait and see before we know who the real winners and losers are.
For more information on how the General Election will affect your personal finances, please don’t hesitate to get in touch with us in the normal way.