Letter from the Editor: The Budget balancing act… could pensioners end up paying the price?

We might have seen far fewer government leaks this year than in the run-up to the last Budget, but that hasn’t put an end to the speculation. And that’s no surprise.

Chancellor John Healey is going to have to pull off some pretty spectacular magic tricks if he wants to ease cost-of-living pressures on the growing number of households feeling the pinch, protect pensioners’ incomes, deliver on promises to cut energy bills and support struggling businesses, raise defence spending, reassure the bond markets that he’s serious about keeping borrowing under control — and keep Labour’s manifesto promise not to raise Income Tax, employee National Insurance or VAT.
That’s quite a to-do list.

Something has to give.

Either spending has to be cut, or taxes have to rise.

And with the Government under pressure to raise revenue, I suspect we’ll see a bit of both — with a particular emphasis on tax rises that, technically, aren’t tax rises.

Why pensioners have cause for concern

We know the triple lock is in the sights of this government, and potentially other future governments too, since the idea that it is unsustainable in its current form is not limited to just a small group of Labour politicians. However, at least until the next general election, the government has guaranteed that it is safe.

But another idea doing the rounds* would see National Insurance cut for workers while increasing Income Tax. The theory is that the National Insurance cut would offset the income tax rise for workers, leaving them broadly no worse off. But pensioners don’t pay National Insurance on their pension income, so pensioners wouldn’t benefit from the cut. If you’re in this group, you could simply be left with a higher tax bill.

It’s a controversial idea, and it’s certainly not a confirmed Budget proposal. But it illustrates the problem with promises about headline tax rates: there are other ways to change how much tax people pay without increasing those rates.

Frozen tax thresholds also affect those who are retired

There are other possibilities, too. Tax thresholds remain frozen until 2031, meaning that as pensions and other income rise, more people can be drawn into paying tax or find themselves paying higher rates of tax. Changes to the way savings or rental income are taxed could also affect some households, even if the main rates of Income Tax remain untouched.

None of this means a pensioner tax raid is inevitable. But if you’re retired, or approaching retirement, it’s worth looking beyond the headline promises and understanding what could affect your own finances.

Of course, pensioners aren’t the only people with something at stake.

Savers and investors will want to know whether changes to investment taxes or allowances could leave them with less of their returns. Those still building a pension will be watching for any changes to pension tax relief or the tax-free lump sum. And anyone relying on the State Pension will want clarity on the triple lock and what it means for their income over the longer term.

Meanwhile, households struggling with everyday costs will be looking for meaningful help with energy bills and other essentials.

Businesses will want support with costs and a credible plan for growth. And the bond markets will be watching closely to see whether the Government can pay for its commitments without borrowing becoming more expensive.

The Chancellor has to balance all these competing demands against the state of the public finances. That’s why I wouldn’t assume that protecting the main rates of Income Tax, National Insurance and VAT means your finances are protected from the Budget’s effects.

Wait and see

There’s a temptation with all this speculation and the anxiety it brings to try and jump the gun; make changes to your financial arrangements to get ahead of potential changes. But there is a big difference between a policy that has been announced and a rumour that has gained traction in the run-up to Budget day. Making a major financial decision based on speculation could leave you worse off, regardless of what the Chancellor eventually announces.

In this week’s special run of pre-Budget guides, we’ve separated what’s already been announced from what’s still uncertain, explained the possible implications in plain English, and highlighted practical steps you can take now.

Because you don’t need to predict every move the Chancellor might make. But you need to understand what could affect you, what you can control, and where it may be worth getting help.

You can read all our Budget guides here:

What to expect if you’re struggling with household bills
What to expect if you’re a saver
What to expect if you’re a homeowner, landlord or renter
What to expect if you’re an investor
What to expect if you’re planning for retirement
What to expect if you’re already retired
What to expect if you’re a business owner

And if you think you need personalised support from a professional to grow, protect and preserve your money, contact an Independent Financial Advisor.

Sources

*https://www.thisismoney.co.uk/money/markets/article-16202871/Labours-think-tank-backs-6bn-tax-raid-pensioners-landlords.html?ns_mchannel=rss&ns_campaign=1490&ito=1490