What a Tory government means for your wallet

8 May 2015

With David Cameron's Conservatives heading back to No.10 alone, the 52% of Moneywise readers who told us they believed the party would be best for their household finances in our pre-election poll will be relieved.

So what can the nation expect for their finances under a Tory government? Here the experts share their views.

Pensions: Higher-rate taxpayers need to act now

Tom McPhail, head of pensions research at Hargreaves Lansdown, has warned higher-rate taxpayers to take advantage of tax relief on their pension contributions while they still can.

He said: "After the seismic changes in the 2014 Budget, further changes to pension taxation seem inevitable, particularly for higher earners. In particular, given the manifesto proposals, anyone with plans to make pension contributions in the immediate future and particularly those paying higher rates of tax should consider acting sooner rather than later.

"In their pre-election Manifesto, the Conservatives announced plans to cut pension tax relief for high earners."

"There is currently a provision, which allows an investor to contribute more than the annual allowance [of £40,000] by ‘carrying forward' any unused annual allowance from the last three tax years. The Conservatives have not confirmed if they plan to target this opportunity."

Annuity rates could rise

With bond yields edging upwards in recent weeks (15-year gilts up from 1.7% on 30 January to 2.3% on 7 May), McPhail said this could mean annuity rates could get pulled upwards "in the days and weeks to come". But, he added, "we have had so many false dawns in the annuity market over the past five years that investors should be wary of pinning their hopes on a significant improvement in the rates".

Property: House prices will start to rise

Charlie Ellingworth from independent buying agents Property Vision is optimistic about the prospects for the housing market but is wary of prices rising too quickly.

He said: "This election result is an unambiguously positive result for the housing market. The spectre of a mansion tax has haunted the market for the first half of this year and now that threat has gone turnover will certainly pick up. One has to hope that will not cause further crazy upward spirals in prices.
"If the Conservatives have any sense they will spike the Labour guns for the future by reforming the council tax bands. It is also to be hoped that they will somehow manage to kick the insane Right to Buy election pledge into the long grass where it deserves to stay."

Savings: two new Isas

The Coalition intended to introduce two new Isas – the peer-to-peer Isa and the Help to Buy Isa - and the Tories are very likely to go ahead with the launches as planned.

A consultation has been underway to decide how exactly a peer-to-peer Isa will work in practice. It could be a new third Isa enabling people to invest in peer-to-peer (P2P) products within a tax-free wrapper outside of a stocks and shares Isa or cash Isa.

The fledgling P2P industry, which sees savers lend money directly via websites such as Ratesetter and Zopa in order to gain better returns on their money, has seen £1.6 billion lent to borrowers so far.

While no decisions have yet been made, the Isas could be available as soon as April 2016.

As for Help to Buy Isas that will top up the savings of those trying to build up a deposit for their first home, the accounts are expected to become available from around September. It is thought they will sit alongside cash Isas, so anything a saver wishes to deposit will come out of their cash Isa allowance. The accounts are are still in the planning stage but here’s what we know so far.

The maximum an individual will initially be able to pay in to open the Isa will be £1,000. From the next month onwards, they will be able to make further deposits of up to £200 each time.

The government will reward their saving habit by paying a £50 bonus for every £200 saved when they buy a home. The minimum bonus the government will pay is set at £400, meaning the saver must have built up a balance of at least £1,600. This sum would take at least four months to build up.

The government bonus will be capped at £3,000 and a saver would have to save £12,000 in the account to qualify for the maximum bonus. However, it would take more than four years for a saver to build up £12,000 in the Isa.

The government will pay the bonus when the saver’s home purchase is being completed

Savings: new tax-free allowance

From April 2016, 95% of UK taxpayers will no longer have to pay tax on savings interest at all. In the Chancellor’s Budget in March 2015, George Osborne announced the introduction of the annual Personal Savings Allowance that will make the first £1,000 of interest earned from savings completely tax-free for basic-rate taxpayers from April 2016. You would have to have £50,000 in an account paying 2% to generate £1,000 of interest (gross) a year. Higher-rate taxpayers will also have an allowance but this is lower at £500.  

The allowance means anyone earning up to £42,700 (basic-rate taxpayers) and enjoying interest on their non-Isa savings of, say, £800, would be able to keep it all tax-free. But should the interest amount to, say, £1,200, then they would have to pay tax on £200 over and above the maxium £1,000 allowance. Similarly, those earning £42,701 to £150,000 and receiving savings interest of £800 would enjoy the first £500 of it tax-free but would have to pay tax on the remaining £300.

While the changes mean that there won’t be any real difference between cash Isas and normal savings accounts in terms of tax treatment from one year to the next, for basic-rate taxpayers – as mentioned above – it is over the long-term that Isas will really come into their own. If you’re fortunate enough to be able to use your full annual Isa allowance, it will only take you four years to build up a £50,000 pot that could generate the maximum personal savings allowance of £1,000 interest (gross, assuming a 2% interest rate).

As for the running of an Isa, although some allow you to pay money in one day and withdraw it the next, if you do take money out you won’t be able to replace that part of your Isa allowance for the rest of the current tax year. However, this rule – which has been in place since the introduction of Isas in 1999 – is being scrapped in autumn 2015. So people will be able to repay in any money they withdraw within the same tax year.

Investment: Boost to UK markets and funds

Interactive Investor's head of investment Rebecca O'Keeffe said: "UK equities are buzzing after a clear mandate for the incumbent Conservative government delivered certainty for investors. The government and Central Bank have actively supported small to medium-seized enterprises over the past five years, and the prospect of further backing and a pro-business directive is positive for UK markets, in particular smaller, UK-focused companies.

"Potential overseas investors will also be looking at the UK with new-found interest."

In terms of individual investment sectors, Laith Khalaf, senior analyst at Hargreaves Lansdown, added: "The receding chance of an energy price cap, promised by the Labour party, has put the wind in the sails of utility companies, which rose by 4% in early trading, with Centrica rising by 7% and SSE rising by 5%.
"Likewise the housebuilders also feature highly in the winners' list, with Persimmon, Barratt and Taylor Wimpey all rising by over 4%, now the mansion tax looks to be out of the picture.
"Financials also saw gains with Lloyds rising 6% and Royal Bank of Scotland rising 5%."

Income tax: Personal allowance and higher-rate threshold to rise

How much you pay in income tax depends on how much money you earn. All UK residents have a personal allowance, which is the amount of money you can earn or receive each year without having to pay any tax on it.
In the 2015/16 tax year, the allowance is £10,600, (although those over the age of 65 may be entitled to a higher allowance) and this will rise to £10,800 from April 2016, as announced in the Chancellor’s 2015 Budget. Osborne said it will rise once again in 2017/18 to £11,000.
To make sure the full benefits of the personal allowance increase are passed on to higher-rate taxpayers, the Tories plan to increase the point at which higher earners start paying 40% tax.
Currently, those with a gross annual salary of £42,385 (made up of the £10,600 personal allowance and taxable income of £31,785) simply pay basic-rate income tax at 20% of anything over the personal allowance. 
This upper limit – the point after which the higher-rate kicks in – is scheduled to increase by £315 in 2016/17, and by £600 in 2017/18 taking it to a gross salary of £43,300 in 2017/18. 
The Tories have previously announced they plan to raise this to £50,000 if they win power. 

Energy prices - “pretty significant cuts”

Mark Todd, director of price comparison site energyhelpline.com,said we can expect to see “a more vibrant energy market, more competition” and “some pretty significant price cuts” – that is “if the suppliers are fair to their loyal customers”, he added, which is a pretty big if. 
"Energy suppliers have been hinting that the Labour price freeze has been a problem depressing price cuts for some time. Now that spectre is lifted it’s time for them to pass on the price cuts that people really deserve. Not the tiny 2.5% cuts we have seen so far this year but ones that reflect the collapse in wholesale prices of energy over the past few years. Further cuts of up to 5% across the board should be possible from every major supplier on their standard tariffs.
“How can we justify this I hear you say? Well, wholesale gas prices have dropped 30% in the last 3 years but domestic gas prices are up 6% on average. Wholesale electricity has dropped 13% in the last 2 years but the domestic electricity price is up 5.3%. These statistics should mean significant price cuts are possible. At the same time supplier profits have risen to 9% or £120 per customer per year according to OFGEM. These profit levels are treble what they were 5 years ago and pretty high for a commodity. 
“In future years, the market is likely to see environmental taxes reduced – David Cameron famously talked about getting rid of the ‘green crap’ – and Ed Davey, the Energy Secretary and the Lib Dems the environmental doves are now gone from government.”


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