Steve Webb: What a lifetime allowance return under Labour could look like

If the polls are to be believed, a Labour-led government is likely to be elected next year.

That new government could make an emergency Budget statement during 2024/25 and implement changes with effect from April 2025 or even sooner.

But what do we know about the decisions a potential future Labour government might make?

The short answer is remarkably little.

Opposition parties with large poll leads have very little incentive to be explicit about their tax plans. Any detailed tax plan provides ammunition for their opponents, as the late John Smith found after tabling Labour’s detailed tax plans ahead of the 1992 general election.

Advisers may be sceptical about how far they can rely on these pledges

Much of what we have heard from the shadow chancellor Rachel Reeves has been about what a Labour government will not do. For example:

• There are ‘no plans’ to increase rates of income tax
• There are ‘no plans’ for a wealth tax, and would not increase capital gains tax or introduce new taxes on property income
• There are ‘no plans’ to cut higher rate pension tax relief

The rather short list of individual tax measures which have been floated include:

• Reducing tax breaks for those with ‘non-dom’ status
• Removing the charitable status of private schools
• Removing the ability of ‘private equity fund managers’ (and others) to benefit from a tax break on ‘carried interest’

Aside from this, in a recent interview, Reeves said: “We don’t have any plans to increase taxes outside of what we’ve said”.

Advisers may be sceptical about how far they can rely on these pledges. For example, the Institute for Fiscal Studies has argued the spending plans a new government will inherit may be hard to meet.

As the present government has demonstrated, it’s perfectly possible to raise billions in extra tax revenue without raising headline tax rates

A Labour government might decide taxes need to be raised once in office, arguing a different strategy is needed now they have ‘opened the books’.

In addition, as the present government has demonstrated, it’s perfectly possible to raise billions in extra tax revenue without raising headline tax rates. The multi-year freeze of tax thresholds has added tens of billions of pounds to tax revenues without the need to raise tax rates. Similar ‘stealth taxes’ are likely to be keenly studied by an incoming government.

But one other tax measure which has been promised is the reversal of the pension measures announced in the 2023 Budget, including the reinstatement of the lifetime allowance (LTA).

We have little detail on how this might be done – though it would be equally fair to say the current government still hasn’t finished spelling out exactly how the LTA will be abolished.

I think it is quite likely the Labour party itself does not know the answer to these questions

One fundamental question is whether Labour would start everyone off with a ‘zero’ figure for the amount of LTA so far used up? Or, for example, if someone has just started drawing a defined benefit pension of £35,000 per year (and took no lump sum), might they be deemed to have used up £700,000 of their newly reinstated LTA?

My personal view is that something like this is quite likely.

But there is much we do not know. What would happen to people who boosted their pension pot since April 2023 and will be over the old LTA figure by 2024/25? Would these people face an LTA charge when they crystallise these savings, or could they apply for some form of protection? How would Labour deal with the issue of high earning doctors who were taking early retirement partly because of LTA issues?

I think it is quite likely the Labour party itself does not know the answer to these questions. Opposition parties have limited resources for detailed policy development, especially in technical areas, so these decisions may ultimately only be taken once in government.

In the meantime, it seems highly likely the prospect of a potential change of government is going to keep advisers busy, both in the run-up to a general election and when a new government begins to implement its new agenda.

Steve Webb is a partner at consultants LCP and was pensions minister 2010-15