What to do now to shield your money from Labour

With a general election pencilled in for the autumn, Labour’s charm offensive on tax has cranked into overdrive.

Speaking in Davos this week, shadow chancellor Rachel Reeves hinted at tax cuts for top earners as she tried to recast Labour as the party of growth.

Lowering taxes on “working people” remains a priority, she said, including those paying the highest 45p rate.

A multi-year campaign of Tory stealth taxes means Britons are buckling under the heaviest tax burden since the 1940s.

Yet despite Ms Reeves comforting words the pain could be about to get worse.

Labour insists it has “no plans” to increase rates of income tax, or to introduce a wealth tax. But plans change, and the party’s proposals to add levies to private schools, reimpose limits on pension savings and scrap “non-dom” status are fueling fears of wider tax hikes.

Many middle-class Britons are worried about what a Labour government would mean for their money and are rearranging their financial affairs accordingly.

Sitting back and banking on an electoral upset is becoming a worse idea by the day. The most extensive YouGov polling for half a decade predicts a Tory wipeout in the Commons, cut down to just 169 seats to Labour’s 385.

“The question isn’t whether Labour will get in, but what they’re going to change when they do,” says David Lesperance, founder and head of international tax advice firm Lesperance & Associates.

Pension uncertainty

Labour has perhaps been deliberately vague about its tax-and-spend plans, even on the few proposals it has announced.

The lack of clarity makes political sense, says Steve Webb, a former pensions minister, now of consultants Lane Clark and Peacock (LCP). “The more specific you are, the easier it is to attack you. And good ideas can be nicked. All parties do it.”

But for those trying to plan their next financial move, the absence of detail is “really unhelpful”, says Ian Cooke, of wealth manager Quilter, especially for those fifty-somethings with large pension pots.

At the spring Budget in March, Ms Reeves pounced on Chancellor Jeremy Hunt’s announcement that he was abolishing the lifetime allowance. The change to pension rules was a “tax cut for the rich”, she said, and a Labour government would reverse it.

Getting rid of the lifetime allowance means workers can now accumulate unlimited pension savings without having to pay additional tax, while those looking to retire can cash out up to £268,275, or 25pc of the old lifetime allowance, tax free.

Previously, accessed pension savings over the lifetime limit were subject to a tax charge of up to 55pc.

Labour’s pledge to reinstate the cap has sparked a rush among those approaching pension age to cash in on any savings over the limit now, before the old tax regime – or a new version – can be imposed.

The reintroduction could affect up to 6pc of savers with pension funds approaching retirement, or around 250,000 people, LCP analysis shows. This number could snowball as wage inflation and investment growth carry thousands more over the threshold.

Labour hasn’t said whether its lifetime allowance will resemble the old one. “I would be quite surprised if they bring it back at the level it was at when it was abolished,” Mr Webb says. “I suspect they themselves don’t yet know.”

He adds: “Unless Labour are very clear about their post-election plans, we could easily see a surge in NHS retirements, senior consultants who say I’m not going to take a chance, I’ll take my pension now.

“And given the new government wants to improve the NHS, that’s the last thing they want.”

Some savers stand to lose tens of thousands of pounds if they fall foul of the rules, according to Mr Cook.

He says: “I have a client approaching the lifetime allowance limit who wants to know whether to put an extra £60,000 into his pot this year.

“It’s very tax efficient, but I can’t recommend he does it because we don’t know what the rules are going to be.

“He could end up putting it in to save 40pc tax, but then get hit with 55pc tax because Labour brings back the cap in the future.”

Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association, says the greatest impact will be felt by higher earners who have amassed a large pot of pension savings, which tends to be those who have had “an above average income for a long period of time”.

He said: “Doctors, consultants, long-standing public servants, and those in the private sector who have had long-term [defined benefit] provision – these have been the most obvious examples in recent years.”

The question savers face is whether to make the most of today’s generous pension rules, or err on the side of caution in case Labour pulls the rug out from underneath their feet.

Some may be tempted to crystallise their pension early in case a tax charge is reintroduced. But it’s worth being cautious about drawing a pension unless it’s essential, as taking a lump sum out of a pension brings the money into the scope of inheritance tax, levied at 40pc of a person’s estate above £325,000 when they die.

Mr Dabrowski says: “One basic step would be understanding whether you should make plans to take your pension out now or soon while things are under the current regime.

“The other option would be to hold off and see if you are affected. If not, you may not need to crystallise things quickly.

“Think about whether you can hold off, what risks you might be running, how quickly you could act if something changed with 12 months’ notice.

“You could also redirect the money going into your pension into other options, into trusts or other means.”

One saving grace is that any Labour reform to the pension system won’t kick in straight away.

“Any change wouldn’t happen quickly. The Government would have to announce any changes in their first budget, and then consult on them.

“It would be the following tax year at the very earliest before it comes in, so there will probably be one to two years to adjust. At the very longest, this might be at the end of a new Parliament.”

Mr Dabrowski also believes it is unlikely that a Labour government would “retroactively punish” people who have exceeded the threshold between the announcement of policy and the change coming into effect.

Strivers punished

As with pensions, Sir Keir Starmer’s threat to scrap the VAT exemption for private schools is forcing taxpayers into life-changing financial decisions. The move could mean fees rising by 20pc as schools feel compelled to pass on the cost to parents.

The average day school fee in Britain is £16,656 per year, while the average boarding school fee is around £39,000, according to the Independent Schools Council (ISC), a trade body.

Telegraph research has found that parents at almost a quarter of day schools would face fees of more than £30,000 if schools pass on their increased costs.

Sending three children to a private day school between the ages of five and 18 will cost £800,000 on average, according to digital wealth manager Moneyfarm. If VAT is added to these fees it would mean parents having to find an extra £160,000 over the course of their children’s education.

This may prove too steep for some. “Parents are very worried,” says Silas Edmonds, headmaster of Ewell Castle in Epsom, Surrey.

“It’s a very real attack. Many are already pulling their children out of private schools because they can’t afford fees.”

Mr Edmonds insists that the “stereotypical image” of private school children – boys from Eton in top hats and tails – is misleading.

“The reality is very different. Those schools that are the preserve of the super-rich charging fees of £40,000 a year won’t be affected at all [by the VAT hit].

“But the majority of independent schools are far more modest. Some are charitable trusts on very, very tight margins. Parents are making significant sacrifices to afford the school fees.”

Mr Edmonds’ school, where fees range from £3,695 to £6,731 per term, has around 680 pupils, but it would be “struggling”, he says, if numbers dropped by “even 30 or 40”.

The cost of energy bills, the five percentage point rise in teacher pension contributions due to come in from April, and the touted VAT charge are creating a “perfect storm”, threatening the viability of private schools. “We’re being squeezed from every angle.”

An ISC survey found that 20pc of parents “would definitely” withdraw their children if VAT were added to school fees. This would put extra strain on the state sector which would be forced to absorb the pupils.

Whether parents follow through is another matter. Luke Sibieta, a senior research fellow at the Institute for Fiscal Studies (IFS), has said a mass exodus of private school pupils after the VAT fee hits is “incredibly unlikely”.

Even so, the ISC has warned that the greatest impact will be felt by “strivers and sacrificers” who work hardest to pay the fees. The move would also threaten “the survival of the smallest independent schools, which operate on tight margins and without large endowments”.

One option open to more fortunate parents would be to ask grandparents to transfer a chunk of their wealth to ease the burden.

The upside is that transfers made for the education of children are free from inheritance tax – but only if made by the parent.

So if a grandparent gifts a parent a lump sum, it will need to fall outside the “seven-year window” before a grandparent dies to be free of inheritance tax.

Otherwise, grandparents could make gifts out of their surplus income to benefit from the little-used “unlimited gifting” rule that means the seven-year period will not apply.

Mr Cooke is advising one of his clients to consider drawing down a chunk of money in his pension to pay for the expected hike in his grandchildren’s school fees.

“It’s not a way of mitigating the tax,” he says. “But it’s a way of dealing with the problem.”

Taking these sorts of decisions is having a “huge” impact on people in similar positions.

“It may be that later in life [the client] has to forego his own standard of living. The money he’s using to keep his children in private education might well mean there’s less available if he goes into long-term care later in life.”

Parents had hoped that paying fees in advance would allow them to dodge the VAT hit. But Bridget Phillipson, the shadow education secretary, has said Labour’s legislation would be “drawn in such a way to ensure that avoidance can’t take place”.

She suggested that VAT would still apply to payments made before Labour abolished the tax exemption if the payments were made for schooling that takes place after the policy has been introduced.

Closing the early-pay loophole leaves parents with very few options, and the onus will fall on schools to find ways to avoid passing on the full cost.

Private schools may have to resort to trimming the number of bursaries they offer, Mr Edmonds says. “The irony of Labour’s policy is that they think by spanking the independent schools they’re going to help social mobility.

“In actual fact, for the children at our school, some of whom are on full bursaries if they’re from particularly challenging backgrounds, suddenly social mobility is off the table.”

Tempting tax rises

The potential for Labour’s tax policies to backfire extends to so-called “non-doms”.

The party has vowed to scrap the “non-domiciled” tax regime that lets wealthy individuals earn foreign income tax-free for up to 15 years.

Labour claims that forcing non-doms to pay tax on their foreign income could net the Treasury £3.5bn a year.

Yet if non-doms decide to up sticks and leave Britain, they will take their large tax bills with them. Many have already done so, attracted to sunnier, lower tax regimes in the United Arab Emirates and United States.

Some 37,000 non-doms paid £6.2bn in tax in 2020/21, according to HM Revenue & Customs, meaning they paid around £167,000 each on average in income tax, capital gains tax and National Insurance contributions combined.

By comparison, the average tax liability per UK worker last year was just over £7,000, excluding capital gains tax.

Mr Lesperance says his high net-worth non-dom clients are “fine-tuning their escape plans” in anticipation of a Labour government.

But for non-doms wanting to swerve UK tax, moving abroad isn’t the only option.

Sheltering investment portfolios in an offshore insurance bond could be a good idea for those who are confident they will become a basic-rate taxpayer or move to a low-tax jurisdiction later in life.

The income and gains of the bond are not taxed as they arise. However, an exit strategy should be carefully planned to avoid paying income tax on the bond at the higher rate.

An alternative would be to invest for capital growth, rather than income, which could bring assets out of the income tax regime and into capital gains tax.

Doing so would make sense as long as Labour keeps its word not to raise capital gains tax.

However, with the levy set at a historically low level, this may be wishful thinking. “I think a capital gains tax rise would be very tempting for Labour,” says Chris Etherington, of accounting firm RSM.

“As it stands, it doesn’t look like many of Labour’s plans – like VAT on private school fees or changes to non-doms – are going to generate a lot of headroom for spending. So they’re going to look elsewhere.”

Basic-rate taxpayers currently pay 18pc on their profits from the sale of a second home and 10pc for shares, while higher-rate taxpayers pay 28pc and 20pc.

The Conservatives have already dramatically scaled back relief given to sales and payouts that incur capital gains and dividend taxes.

But a hike in the headline rate would “really distort” taxpayer behaviour, Mr Etherington warns. “If Labour were to put it up, people would take action.”

While business owners are usually hit hardest by a capital gains tax hike, landlords would be an “easy target”, he says, if Labour were to “experiment with who should suffer first”.

“You’d probably see more landlords selling up. They’ve seen a lot of tax changes over the last few years. It could be the final nail in the coffin.”

To avoid a big bill later on, those sitting on large capital gains may want to consider selling up ahead of the next election.
Doing so before April 2024 – when the capital gains tax allowance, currently £6,000, halves to £3,000 – would save a higher-rate taxpayer with £50,000-worth of property gains more than £1,000 in tax.

If Labour opted to align rates with income tax, but kept the allowance the same, the tax owed would be £18,800, as opposed to £12,320 today.

Giving assets to family members who are basic-rate taxpayers is one way to avoid paying capital gains tax at the higher rates of 20pc and 28pc.

If you own shares and see a capital gains tax rise coming down the track, it’s worth considering a so-called “bed and breakfast” deal, according to Mr Etherington.

This involves selling the shares, triggering capital gains tax at the current (lower) rate, before re-buying the shares 30 days later, and avoiding a higher liability further down the line.

No room for manoeuvre

Given the state of the public finances Labour would inherit, the chances of the party introducing net tax cuts are vanishingly small.

But what if Ms Reeves’ tax-cutting hints are taken at face value?

The shadow chancellor is thought to be weighing up plans to offer income tax or National Insurance cuts in Labour’s general election manifesto, as a “retail” offer to the electorate.

However, as Paul Johnson, director of the IFS, warns, following through on these cuts would necessitate tax hikes elsewhere.

Whoever wins the election will have “very little room for manoeuvre”, he says. “The underlying problem is that we have high taxes and very little room for increasing spending if we want to get debt down.”

In terms of the taxes Labour could increase, the options are “as long as a piece of string.”

Owners of more expensive homes could face higher council tax bills, Mr Johnson says, a policy that would hit many current pensioners who tend to live in larger, more valuable homes.

The party may also consider tax relief on pension contributions, which would leave current workers able to save less into their pension pots tax-free.

Inheritance tax rules could also be tightened, making it harder for the elderly to leave money to their families after they die, without incurring a levy.

“None of these are going to raise you piles of money, but they can raise you some, a small number of billions,” he says.

“Historically, when governments have gone looking for money they have sometimes gone for big VAT increases.”

If Labour does raise taxes, it could argue that it is simply following the current government’s example. The Chancellor signalled this week that he will deliver a tax-cutting Budget in March, admitting that voters are “very angry” about high levies.

Yet with income tax thresholds frozen until 2027/28, inflation is set to drag more than seven million people into higher income tax bands by the end of the decade as allowances fail to keep pace with price rises. Sir Keir has refused to commit to unfreezing these thresholds if Labour comes to power.

Background spending pressures on healthcare, welfare and pensions will mean the tax burden will continue to climb whoever wins the election, says John O’Connell, head of the Taxpayers’ Alliance. It will also make it difficult for Labour to stick to its pledges on wealth and income tax.

He adds: “Unless there’s significant reform on one or all of these ‘big three’, any government is going to struggle to get spending under control, so that they can deliver meaningful tax cuts.

“Labour saying they won’t put up headline rates on income tax is all well and good, but as we’ve seen with the current government, there are ways they can get around that to squeeze taxpayers more.”