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Tory Party manifesto – financial services considerations

25 November 2019

The weekend saw the Conservative Party publish its manifesto. Industry commentators highlighted policies which affect financial services.

Conservative Prime Minister Boris Johnson has promised to build a strong economy, in which everyone contributes their “fair share” as he launches the party’s 2019 election manifesto.

In its 59-page manifesto, the Conservatives have vowed to back businesses with lower taxes, address the pensions anomaly affecting higher and lower earners and improve social care.

Tax

The Conservatives have pledged a “triple tax lock” to ensure tax rates of income tax, national insurance and VAT do not rise for the next five years.

It follows a promise to raise the National Insurance threshold to £9,500 next year, with the ambition of eventually increasing it to £12,500.

Part of the funding will come from the party’s continued campaign against tax avoidance and evasion measures, which they expect will generate £200m in government revenue by 2023-24.

Laura Suter, personal finance analyst, AJ Bell, said the announcement was a shift from Mr Johnson’s previous pledge to move the rate at which people pay the 40% rate of income tax from £50,000 to £80,000, which would only benefit higher earners.

Suter said: “By shifting National Insurance rates rather than income tax thresholds Mr Johnson extends the giveaway to the lowest earners, in particular those earning less than the current £12,500 personal allowance.

“Unlike Labour, the Conservatives have committed to not raising National Insurance, income tax and VAT, echoing the same pledge made in their 2015 manifesto. It’s interesting that the party have chosen to keep this promise considering these are the main sources of revenue raising for the Government.”

On top of this, the party has said it will reduce business rates via a “fundamental review of the system” and increase the Employment Allowance for small businesses, which will benefit half a million small firms.

Pensions

The Conservatives used their manifesto to address the pension tax relief anomaly affecting both lower and higher earners.

A number of workers, predominantly female, who earn between £10,000 and £12,500 have been missing out on pension benefits because of a loophole affecting those with net pay pension schemes.

It means some workers earning £12,499 a year could retire with a pot worth £59,000, while others will end up with £51,000. According to a recent Freedom of Information request by Royal London, around 1.7 million workers are affected.

But while the Conservatives have pledged to conduct a review to look at how to fix the issue, the manifesto stops short of providing detail on how and when this would be done.

Tom Selby, senior analyst, AJ Bell, said: “It is particularly cruel this anomaly in the system hurts the lowest paid who need the tax relief boost the most. Hopefully this manifesto commitment will be turned into action if the Conservatives are victorious at next month’s election.”

In addition, the Conservatives have also vowed to deal with the NHS pension issue faced by senior doctors, who risk large and unpredictable tax penalties for additional work because of the tapered annual allowance. The party plans to hold an urgent review within the first 30 days of government if they remain in power.

Steve Webb, director of policy, Royal London, welcomed the party’s decision to address the pension issues, but said it did not go far enough in providing a solution for higher earners.

Webb said: “It is welcome that the conservative manifesto refers to two of the various anomalies in the pension tax relief system. On low-paid workers, the manifesto represents a welcome shift in position after the government has refused to act for several years.

“But on the tapered annual allowance, the measure proposed is far too narrow and may not even work. The tapered annual allowance affects far more people than senior NHS clinicians and creates complexity and uncertainty in the tax system. The best solution would be to abolish it outright.”

Jon Greer, head of retirement policy, Quilter. also criticised the manifesto for its lack of detail

He said: “The taper problem was introduced by the Conservative government. The ill-conceived policy has had a disastrous impact on the NHS and has the capacity to bring several public services to a grinding halt. Despite this, Boris Johnson’s Tory party appear to refuse to accept that the taper is not fit for purpose and should be scrapped, instead choosing to look for short term bespoke fixes for the NHS.”

Auto enrolment

Industry experts expressed disappointment that the manifesto failed to extend the scope of auto-enrolment to include younger workers, or lower paid workers with multiple jobs and the self-employed.

It also failed to commit to raising the minimum contribution levels from the current 8%.

Nigel Peaple, director of policy & research, The Pensions and Lifetime Savings Association, said: “Less than 50% of all savers are on track to achieve an adequate income in retirement as defined by the Pensions Commission, and for those who only have DC pensions, only 3% of savers are likely to achieve this outcome.

“Our report recommended raising minimum automatic enrolment contributions to 12% by 2030 with consideration given to moving to a 50/50 employer/employee split. This will improve pension adequacy and help more people achieve a better income in retirement.”

Triple lock for pensions

The Conservatives have also vowed to retain the triple lock, which guarantees that the state pension will rise by the higher of inflation, average earnings growth or 2.5%.

Selby described the triple lock as a “hugely valuable” income guarantee for pensioners, but said the logic of a 2.5% underpin was hard to fathom.

Selby commented: “Essentially its continuing existence means the real value of the state pension will increase at random and in a way that is difficult to account for as it is tricky to guess what the economy will do over months, let alone years.

“A much more sensible policy would set a level for the state pension which is deemed fair and then link this to earnings or inflation, or both. However, the triple-lock has become something of a totem for ‘doing right by older people’ to the point where little thought appears to be put into its purpose.”

Social care

The Conservatives have pledged £1billion extra funding every year and has said it will commit to seeking a cross-party consensus to bring forward legislation for long-term reform.

However, Rachael Griffin, tax and financial planning expert, Quilter, called the Conservative approach “a pretty uncontroversial, get out stance of having a cross-party agreement.”

She said: “Social care policy must be delivered and there are a number of key pillars that are needed to support a social care system no matter what structure is in place, but it all starts with simplicity and awareness to get the public on board. Inevitably, we are going to end up with a structure where the state commits to pay for some and the public will have to self-fund the rest.”

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