- Rishi Sunak announces plans to cut NI by a further 2 percentage points by 2027 and gradually abolish self-employed NI during the next parliament in the Conservatives’ manifesto released today
- The manifesto also outlines a long-term aim to remove NI altogether ‘when it is affordable to do so’
- Tax pledges including cuts to NI, state pension ‘triple lock plus’, reforming the child benefit tax charge and permanent stamp duty cuts for first time buyers amount to £17bn a year by 2029-30
- No commitment to end the freeze on income tax thresholds, beyond the pledge to raise the personal allowance for pensioners
- Stamp Duty cuts for first time buyers would be made permanent
- British ISA absent from manifesto, despite being announced at the Budget just three months ago
- Commitment to pensions stability under a ‘Pension Tax Guarantee’ that promises to maintain tax-free cash and marginal rate tax relief
Laura Suter, director of personal finance at AJ Bell, comments on the personal finance announcements in the Conservative manifesto:
Proposed cuts to National Insurance
“The Conservatives are sticking with their previous playbook of focusing on cutting National Insurance, rather than making other changes to taxes. While it’s done little to move the needle when it comes to voter enthusiasm for the Conservatives, the party clearly feels that having the headline of ‘abolishing National Insurance’ is a stronger message than tinkering with income tax rates. But voters will have to wait for this handout, with the Conservatives only pledging to make the cut from April 2027.
“A move to make a further 2 percentage point cut to starter rate for National Insurance would mean that for employed people the main rate would halve from the previous 12% to 6%, while for the self-employed it would be cut from 9% down to 4%. So how much would it actually save workers? Whether employed or self-employed, a person earning £35,000 would save almost £450 a year in National Insurance, while anyone earning more than the higher-rate allowance of £50,270 would save the maximum £754 a year. But lower earners won’t be celebrating the move. Someone on £15,000 a year will save less than £50 a year on their National Insurance bill if the plans see the light of day.
“The highest earners will be feeling short-changed too, as someone on £100,000 a year will save the same amount as someone earning half that salary. While some may struggle to muster up much sympathy for those earning six-figures, this move would have a huge impact on single earner households. A couple each earning £50,000 a year will see their combined National Insurance bill cut by almost £1,500 a year but a sole earner on £100,000 will only save £754 a year.
“Also missing out are those above state pension age and earning less than the National Insurance threshold of £12,570, who would see no difference from the proposed cut. The reason that a cut to National Insurance is cheaper than the same cut to income tax is because it benefits fewer people. Those over state pension age don’t pay National Insurance, whereas they do pay income tax.
“The other uncomfortable fact is that while these are tax cuts, the Tories have also presided over a huge increase in income taxes thanks to the freeze on income tax allowances during a period of high inflation. That freeze is set to remain until 2028. While most of the nation’s National Insurance bills would be lower after the proposed cuts, for many their total tax bills will still be higher than if the government had never introduced the income tax band freeze.”
Stamp duty reforms nothing new
“Rishi Sunak has admitted that it has become harder to become a homeowner under the Conservatives, but his policies for first-time buyers will do little to change the situation. Rather than announcing new policy, the Tories have opted to rinse and repeat their previous policy and just extend existing schemes.
“They will extend the current stamp duty holiday for first homebuyers and make it permanent, meaning that first-time buyers will pay no stamp duty on purchases up to £425,000. This previous policy is due to expire in March next year. The manifesto doesn’t make clear whether it will also extend the relief for those buying a property worth up to £625,000 – who currently benefit from no stamp duty on the first £425,000 of their purchase. At the same time, the Tories will extend the Help to Buy scheme, which offers loans of up to 20% for homeowners buying new-build properties. While the manifesto claims it will bring in a ‘new and improved’ scheme, it’s decidedly sparse on details as to how it will be bigger and better than before.
“Most aspiring homebuyers will likely find this set of policies lacking in imagination and excitement. While they will help to get some people on the property ladder, it’s not the drastic reform that many would have been looking for. Likewise, once again the Lifetime ISA is overlooked as a key way to boost first-time buyers’ deposit savings.”
Tom Selby, director of public policy at AJ Bell, comments on pensions and ISAs:
Pension tax guarantee
“The promise by the Conservatives to deliver stability in the pension tax system by not adding new taxes to pensions, maintaining the current system of tax relief and keeping the tax-free lump sum is welcome. Pensions have suffered from near-constant tinkering over the last 14 years, an approach which has layered on complexity and created huge uncertainty for long-term savers.
“However, it is important to take this pledge with a pinch of salt. The 25% tax-free lump sum is now capped at £268,275, and failing to increase this amount will effectively mean tax-free cash is steadily eroded by inflation. What’s more, the Conservatives haven’t ruled out making tweaks to the existing allowances.
“That said, this commitment is a step in the right direction and would at least give savers some confidence that the rules will not constantly be changed. Having shown pragmatism by dropping plans to reintroduce the lifetime allowance, it would be a huge positive if Labour also committed to delivering stability and predictability in the pension tax system. This approach would give millions of Brits the confidence to save for retirement without the constant threat that the rug is about to be pulled from under them.
“Over the longer term, there is an argument that the pensions tax system could be simplified for the benefit of savers. In particular, the complex set of annual allowances that currently exist are a barrier to communication of the benefits of saving for retirement.”
British ISA plans absent from Conservative manifesto
“Given it was the current government that proposed creating a new ‘British ISA’, with the aim of boosting capital markets and ultimately the UK economy, most were expecting to see the plans included in the Conservative manifesto. The fact the British ISA doesn’t even get a passing mention hopefully means Rishi Sunak’s party have recognised the fundamental flaws in the proposals and are quietly dropping the plans.
“The idea consulted on would have created a new, additional £5,000 ISA allowance, restricted to as-yet-undefined UK companies and potentially UK-focused investment vehicles. As AJ Bell has argued from the start, this ill-thought-through plan would have been ineffective and add unwelcome complexity to ISAs in the bargain. Over the long term, this complexity would risk deterring people using ISAs to invest for the long term.
“The absolute maximum that could have flowed to UK Plc as a result of the British ISA was around £4 billion a year, which might sound like a lot but in the context of a £2 trillion stock market is a pittance.
“What’s more, behavioural adjustments would likely have significantly neutered its impact, while over the long term the added complexity created would inevitably have put potential investors off ISAs. Increasing the overall ISA allowance to £25,000 would likely deliver a similar boost to UK Plc, without layering on unwelcome complexity.
“The new government needs to take a sensible, saver-focused approach to ISA reform, starting with ISA simplification. No policymaker starting from scratch would advocate for six different types of ISA, which our research shows often leaves potential investors overwhelmed.”
The case for ISA simplification
“A new government with a fresh mandate post-election will have a huge opportunity to deliver lasting reforms for the benefit of savers and investors. The fact both Labour and the Conservatives have previously committed to ISA simplification is a huge positive, but to deliver genuine benefits to millions of Brits the next administration needs to be radical.
“AJ Bell has long campaigned for the ISA landscape to be simplified by combining the best features of the existing six types into a single ‘One ISA’. As a first step, the next government should look at merging Cash and Stocks and Shares ISAs, the two main ISA products used by investors.
“This move would make it simpler for investors to shift between cash and investments and move us towards a world where investments are simply a feature of ISAs, rather than a defining characteristic. Platforms could then build a more flexible ISA with the ability to move freely between cash and investments – something which would tie in with wider efforts to boost the number of people investing for the long term, including in UK Plc.
“As part of this review of ISAs, policymakers should also consider super charging the Lifetime ISA by scrapping the exit penalty and increasing the minimum property limit from £450,000.”
State pension ‘triple-lock plus’
“We knew well before the publication of the Conservative manifesto that Rishi Sunak was planning to make a big pitch to older voters by not only committing to the state pension ‘triple-lock’, but also promising to apply the pledge to the personal allowance of those over state pension age. This is a pretty naked grab for older votes and an attempt to create a state pension tax trap for Labour, who have also committed to the triple-lock but not to unfreeze the personal allowance.
“Beyond pure election tactics, it is hard to think of a good reason to increase the personal allowance for pensioners alone. It would make much more sense to come clean about the aim of the triple-lock, which has never been articulated, and then set a sensible path to achieving that aim. Instead, we are left with the random ratchet of the triple-lock with no clear goal, and the increasing likelihood the state pension age will need to rise faster to cover the cost – meaning it will be those below state pension age who end up paying the price again.”
Triple-lock policy popular among older voters…but not the young
“Older voters continue to hold the keys to Downing Street, so we should perhaps not be surprised that Sunak has moved to super-charge the triple-lock to win them over. However, there is a serious generational divide when it comes to the policy*, with older people attracted to the pledge and younger voters much less keen.
“This likely reflects the vested interests of both cohorts, with those in receipt of the state pension keen to keep bolstering their incomes, while younger people are perhaps fearful of the impact hiking the state pension today could have on their future state pension entitlement or other areas of public spending. While committing to the triple-lock was the easy choice for both major parties politically, the demographic timebomb hitting the UK means at some point the next government will need to address the fundamental questions of what the state pension should be worth and when people should receive it.”
*Based on a nationally representative survey of 2,041 UK adults, carried out on behalf of AJ Bell between 1 and 3 May 2024 by Opinium.