The new tax year starts tomorrow. A time for celebration? Far from it. More tears than cheers.
While savers and investors will be heartened by the fact that they can again squirrel away up to £20,000 in a cuddly, tax-friendly Isa before April 5 comes around next year, the next 12 months are going to land most of us with bigger income tax bills.
It will result in an erosion of our household finances that many of us can ill afford – especially as it will coincide with rising inflation and higher bills triggered by the fallout from the conflict in the Middle East.
Fatter tax bills are a result of that wretched (and dishonest) taxation ploy called ‘fiscal drag’ which Chancellor Rachel Reeves has taken a liking to (yes, it was also a tactic employed by Conservative chancellors before her).
Reeves’ extension of the freezing of income tax thresholds until 2031 means yet more people (both those who work or who are now retired) are going to get sucked into paying income tax – or higher-rate taxes – in the next five years.
According to the money gurus at investing platform AJ Bell, the cost of this to basic-rate taxpayers in the new tax year will be up to about £700, rising to £3,500 for higher-rate taxpayers. Galling figures.
Five years ago, the Office for Budget Responsibility (OBR) forecast that freezing income tax thresholds would bring some 1.3million people into the income tax regime by 2026 (when the freeze was meant to melt away).
But the extension of the freeze for another five years means that 6 million people will have been dragged into the income tax system by April 6, 2031, with the number of higher-rate taxpayers increasing by 4.8million.
No wonder the country has ground to a halt: consumer confidence has been shot to pieces. Workers and former workers (the retired) are being stripped of their spending power.
And no wonder taxpayers feel aggrieved at the fact that while their finances are being plundered by a rapacious Chancellor, MPs have been given inflation busting pay increases (why?) – while some 6.5million benefit claimants are receiving a 6.2 per cent increase in their payments.
It all seems so unfair – a message many of you have conveyed to me over the past few days (keep your comments coming in – I love them).
‘Betrayal of the strivers,’ said the Daily Mail six days ago, on its front page. Spot on. Readers feel betrayed by a Government which rewards slackers by smothering strivers in layers of extra taxes. It’s outrageous.
I imagine my Dad, a working-class lad made good through hard graft, is turning in his grave at what Labour is doing. Sit at home and get a pay rise. Work and give a mighty chunk of your income to Reeves. Madness.
For those in receipt of the state pension, the new tax year will be greeted with mixed emotions.
On the one hand, those eligible for the full new state pension will see payments rise by 4.8 per cent to £241.30 per week (£12,547.60 a year) – while those who reached pension age before 2016 will have their full rate basic state pension increase from £176.45 a week to £184.90.
Of course, many retirees receive less than the full rate. But on the other hand, it’s less of an increase than undeserving MPs and benefit claimants are getting. And the new starting age for the state pension has been pushed back a year to 67.
Inflation in the coming months, resulting in higher energy costs and food bills, will also absorb most of this payment increase, while tax will take a bigger slice of the state pension than ever before.
With inflation now heading like an Artemis II rocket towards five per cent plus, I imagine the cost of maintaining the state pension triple lock will become a big issue for Labour over the coming months – especially if the country’s finances remain in a parlous state.
For pensioners, it could mean bad news in the Autumn Budget.
The lock means the state pension rises each year by the higher of inflation, average wage increases, and 2.5 per cent. But it’s not guaranteed – and was suspended by the Conservatives in the tax year starting April 2022 after a strong bounce in earnings (8 per cent) post lockdown made the increase unaffordable.
If Labour were to keep the triple lock intact, next year’s increase would more than likely be based on inflation with the rate prevailing this September used. By then, inflation could well be at five per cent, maybe closer to eight per cent.
If this was the case, it could result in the Chancellor following the Conservatives’ lead by suspending the triple lock and suppressing the increase for the 2027 tax year.
Yet Reform UK will make this difficult for Labour.
Last week, Nigel Farage’s party said it would keep the triple lock if elected to power in 2029. This is after previously refusing to guarantee the lock’s survival. Cleverly, it said the promise would be funded by the ‘biggest benefits cut in history’.
My guess is if inflation gets out of control, Reeves could do a ‘Rishi Sunak’ (the Tory chancellor who suspended the triple lock for the 2022 tax year) and temporarily remove inflation from the equation. Like Sunak, she would dress it up as a prudent move made in the interests of the nation’s finances. The Conservatives might find it hard to criticise such a decision.
The mood music on the triple lock’s longevity might also work in Reeves’ favour. Even before Reform UK had announced its long-term support for the triple lock, the think-tank Resolution Foundation had issued a paper calling for it to be scrapped.
Although the Resolution Foundation is as Left-wing as think-tanks go and has long called for the lock to be abandoned, its latest argument is not totally immersed in politics. It says the UK’s declining birth rate will result in a future dearth of taxpayers unable to fund state pensions to the elderly.
It adds: ‘The unsustainability of the pensions triple lock will only become more acute in an increasingly ageing society.’
After Farage’s backing of the triple lock, the Institute of Economic Affairs (at the opposite end of the political spectrum to the Resolution Foundation) weighed in. It describes 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 instead argues for people to be given more opportunity to build their own savings – something Labour has singularly failed to achieve by meddling with Isas (for the worse) and repeatedly refusing to rule out a future clampdown on the tax relief and tax-free cash that pension savers enjoy.
In summary, I think we’re heading for a suspension of the triple lock next year and maybe also the year after that.
I could be wrong – it wouldn’t be the first time – but with Reeves showing no desire to tackle the soaring benefits bill, it would provide her with some much needed financial breathing space.
Longer term, despite Reform UK’s promise, I think the triple lock is on borrowed time.
Labour is wrecking this country’s economy with its cruel tax assault on UK businesses and its obsession with green energy. It’s de-industrialising us and destroying our farming communities.
jeff.prestridge@mailonsunday.co.uk
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