The new tax year begins tomorrow — and there is precious little to celebrate. For most households, it marks the start of another 12 months of financial pressure.
Savers and investors will at least welcome the opportunity to shelter up to £20,000 in a tax-efficient Isa before next April 5 rolls around. But that modest comfort is overshadowed by the reality that the coming year will deliver higher income tax bills for the majority of us — eroding household finances at precisely the wrong moment, as rising inflation and surging energy costs — partly driven by Middle East instability — squeeze budgets further.
The mechanism behind these bigger bills is 'fiscal drag' — the quietly corrosive taxation sleight of hand that Chancellor Rachel Reeves has enthusiastically adopted (it should be noted that Conservative chancellors before her were equally fond of the tactic). By extending the freeze on income tax thresholds until 2031, Reeves ensures that more workers and retirees alike will be pulled into paying income tax for the first time — or find themselves tipped into higher-rate territory — over the next five years.
The numbers are stark. According to analysts at investing platform AJ Bell, basic-rate taxpayers face an additional burden of up to £700 in the new tax year, while higher-rate taxpayers could be hit by as much as £3,500.
Five years ago, the Office for Budget Responsibility (OBR) estimated that freezing income tax thresholds would drag approximately 1.3 million people into the income tax system by 2026 — when the freeze was originally due to end. Extending it by a further five years changes the calculus dramatically: by April 6, 2031, some 6 million additional people will have been pulled into the income tax net, with the number of higher-rate taxpayers rising by 4.8 million.
It is little surprise, then, that consumer confidence has taken a serious hit. Workers and retirees alike are watching their spending power steadily eroded — and many feel justifiably aggrieved that, while their finances tighten, MPs have received above-inflation pay rises and 6.5 million benefit claimants are receiving a 6.2 per cent increase in payments.
For those receiving the state pension, the new tax year brings mixed news. Those entitled to the full new state pension will see payments rise by 4.8 per cent to £241.30 per week (£12,547.60 annually). Those who reached pension age before 2016 will see their full basic state pension increase from £176.45 to £184.90 per week. Many retirees, of course, receive less than the full rate.
However, the increase is smaller than the rises awarded to MPs and benefit claimants. The new state pension age has also been pushed back to 67. And with inflation heading sharply higher — threatening energy bills and food costs — much of that uplift will be absorbed before pensioners see any real benefit. Tax, meanwhile, will take a larger slice of state pension income than ever before.
With inflation potentially surpassing five per cent in the months ahead, the sustainability of the state pension triple lock looks increasingly precarious — and could become a significant political flashpoint for Labour, particularly if the public finances remain under strain. The triple lock guarantees that the state pension rises each year by whichever is highest: inflation, average earnings growth, or 2.5 per cent. It is not, however, a statutory commitment — the Conservatives suspended it for the 2022 tax year after a post-lockdown bounce in earnings of around 8 per cent made the implied increase unaffordable.
If the triple lock remains in place, next year's increase would most likely be pegged to inflation — and if September's figure comes in at five per cent or higher, the cost implications for the Treasury would be considerable. In that scenario, the Chancellor might follow the Conservative playbook and temporarily remove the inflation element, framing it as a prudent measure in the national interest.
The political landscape around the triple lock is also shifting. Reform UK recently pledged to maintain the lock if it wins power in 2029 — a reversal of its previous position — proposing to fund the commitment through what it called 'the biggest benefits cut in history.' Meanwhile, the left-leaning Resolution Foundation has called for the triple lock to be scrapped, arguing that the UK's declining birth rate will leave future generations of taxpayers unable to sustain pension commitments to an ageing population. At the opposite end of the spectrum, the Institute of Economic Affairs characterises the triple lock as an 'electoral bribe' and the state pension as a 'poorly targeted benefit, much of which goes to already well-off pensioners, paid for by working-age people.' It argues instead for policies that give individuals greater opportunity to build their own savings — something it contends Labour has undermined by tinkering with Isas and repeatedly declining to rule out future restrictions on pension tax relief and tax-free cash.
On balance, a suspension of the triple lock next year — and possibly the year after — appears the more likely outcome. With the Chancellor showing little appetite for reining in the benefits bill, suspending the lock would offer some meaningful fiscal breathing room. Longer term, despite Reform UK's pledge, the triple lock looks increasingly difficult to sustain in its current form.
For an Autumn Budget update on these developments, watch this space.