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Every week, Kyle Caldwell and guests take a look at how the biggest stories and emerging trends could affect your investments, with practical tips and ideas to help you navigate your way through. Join the conversation, tell us what you want us to talk about or send us a question to OTM@ii.co.uk. Visit www.ii.co.uk for more investment insight and ideas.
Hello, and welcome to On The Money, the podcast that tackles investments and pension topics in a practical manner. This week, the focus is on the key tax and pension items in new prime minister Andy Bairnham's in tray now that the Makerfield MP has had some time to size up the task at hand. He's already introduced some measures, mainly focused on helping households with the rising cost of living, and himself and chancellor John Healy have some important decisions to make regarding the state pension. Here joining me to discuss this topic is Craig Rickman, who is personal finance editor at Interactive Investor. So we're gonna start off with pensions, and specifically, the pension triple lock, which once again, at the time of this recording, is front page news.
Kyle Caldwell:As the British Chamber of Commerce has aged Healy to abandon the triple lock and instead increase the state pension in line with inflation. It's called on the savings made from that reform to be used towards easing cost pressures on businesses to give firms breathing space to create jobs, investments, and growth. Now, like every prime minister in the past decades, Burnham is under pressure to reform the triple lock, which is the mechanism that operates the state pension every year by the highest of inflation, wage growth, or 2.5%. So, Craig, could you firstly explain why there is lots of debate over the future of the triple lock?
Craig Rickman:Sure. Yeah. So, yeah, I mean, it certainly is a incredibly divisive policy. In fact, gov.co.uk ran a poll earlier this year surveying Labour Party members and asked them, you know, what do you want to happen to the triple lock? Should it be kept?
Craig Rickman:Should it be scrapped? And the results were sort of fairly fairly split, fairly evenly, slightly in in favor, sorry, of of scrapping the policy, which sort of, yeah, illustrates the the division on it and and where people stand. In terms of the the cause to scrap it, which as you know have been sort of mounting for for some time, is around the cost and it's essentially becoming far too expensive to run because you know it means the state pension will increase by the highest of those three metrics, whichever is the highest during, you know, any given tax year. And so there are concerns that the longer that it's kept, that it's gonna become too expensive, far too expensive to run. And so that's the the sort of argument for getting rid of it.
Craig Rickman:On the other side to that, there are lots and lots of people in retirement, of pensioners who rely heavily on the state pension to make ends meet. And so, you know, scrapping the policy at this point, especially during, you know, a period where the cost of living is still rising a lot higher than the government would like, could cause problems for for those groups. So that's the sort of two sides of the argument. In terms of where the government is on it, I mean, within its election manifesto, they promised to keep the triple lock for this parliament. So I see no reason why that will change.
Craig Rickman:So, you know, up until essentially for for the rest of this decade, we wouldn't expect anything to happen to the Triple Lock and for Andy Burnham to make any decisions on it. It that would be it's it's future and and any future decisions around it sort of lie be beyond that date.
Kyle Caldwell:I agree. I think the proverbial canal continues to be kicked down the road. You know, at some point, the sustainability of the Triple Lock needs to be look looked at very closely as The UK population continues to age. But I do think it's something that's in the in tray for a potential future government, particularly after a general election, if a party has a large majority. I think that's that's the time to look at it, because ultimately, you're gonna upset a lot of people if you make any changes, and you're gonna lose some or a large proportion of the so called gray vote.
Craig Rickman:Absolutely. I guess the other the other side to that is if you are going to if the government is gonna replace the triple lock, is what do they replace it with? So there've been various ideas that have been put forward. In fact, if we go back a few years during COVID, the government actually introduced a double lock for for a one year period. They suspended the triple lock element.
Craig Rickman:So So that's one option. But there's there's been various options that have been put forward, is yeah. So that's something for the government to think about, you know, to think about what exactly is gonna replace it before, you know, you you consider scrapping it.
Kyle Caldwell:Let's now move on to something in the entry that is more pressing in terms of time for Burnham, which is that from next April, the full state pension will exceed the tax free personal allowance, which is currently 12,570 a year. So Craig, firstly, how do we get to this situation?
Craig Rickman:Yeah. Sure. So it's been driven by a by a couple of factors, really. So one that we've just been speaking about, which is the the triple lock and the generosity of the increases to the state pension that have arrived under that policy. So that's one aspect and the other is frozen tax thresholds.
Craig Rickman:So this economic phenomenon called fiscal drag, which is so yeah the various income tax and national insurance thresholds have been frozen since 2021 and will remain that way until 2031. So if we go back to 2021, the state pension, the full state pension paid around 9,300 a year. The personal allowance was, yeah, 12,570, which is the same as what it is today. Fast forward to today, you say personal allowance is still at the same level, but the state pension, due to the increases under the triple lock, is now 12,548. So it's just below the the personal allowance.
Craig Rickman:So if you go back to 2021, that meant that if you even if you got the full state pension, you could have sort of other forms of income that might have been from or taxable income from, I don't know, defined benefit schemes, from annuities, from drawdown withdrawals that were taxable that you you still had some personal allowance spare, so you wouldn't necessarily pay pay tax on all that income. But over time, yeah, due to the increases that has now disappeared and from April next year and we can expect the state pension to go up by around £500 that's because the average earnings over the period from May to July that's the measured period looking sort of just above the 4% mark, so that's the increase that it's likely to drive, and so it's going to take the full state pension above the personal allowance and so a proportion of that will be taxed. We should note this isn't sort of a new problem for everyone. So there are sort of there are quite a lot of people who receive income above the state pension for various reasons, for various sort of extras that that they've sort of accumulated over the years.
Craig Rickman:But it's still a it's still a big thing that the the the sort of the full state pension amount will reach a sort of will breach the tax free threshold for the first time.
Kyle Caldwell:And as you mentioned, I mean, it's, you know, people in government, they will have known that, you know, at some point with the tax thresholds frozen and, you know, state pension increases, at some point, it is gonna happen that the state pension will go above the tax free personal allowance. So it's not as if it's not been on their radar for some time. And if you go back to the autumn budget in 2025, Rachel Reeves outlined a policy to protect some pensioners from facing this potential future tax bill next April. So she says, pensioners whose only income is the full new or basic state pension without any increments will not pay income tax, and we are committed to that over this parliament. And this is a promise that both Healy and Burnham have said that they'll push through as well.
Kyle Caldwell:However, there are some complications to that.
Craig Rickman:There are. There's there's quite quite a lot to unpack within this. I think the first thing to say is that any kind of policy that looks to support sort of those on lower incomes, in this case, it's to those who are in retirement, but for sort of anyone across, you know, any demographic demographic across the the population should be welcomed. However, there's yeah. There's a lot to sort of unpick, and this could be quite a complicated policy.
Craig Rickman:And at the moment, we don't really we don't know any more than that statement that you've just read out that Rachel Reeves has said that, yeah, if it's your sole form of retirement income, again, without any increments, and that's a bit that we'll we'll we'll touch on, that you won't pay any tax on it. So where are the complications? So I guess the first thing is, that part without increments. So essentially, if you've got anything extra on top of your state pension, so that could be because you've deferred it by a year or more years or you've got sort of extra benefits, sort of extra additions to the state pension, then potentially even if that is your sole form of income, then you potentially wouldn't qualify. So there's a risk there of of of unfairness because you could essentially have two people on on sort of the same level of income, but because of the technical definition, one might pay tax on their state pension, the other may not.
Craig Rickman:So that's a contentious point, and again, that's something that we need to know a bit more detail about. And the other is this idea of what what would you classify as as as income? Does this mean just taxable income? Does it mean income that that isn't taxed? So for example, ISAs.
Craig Rickman:Where would it leave other things such as, I don't know, withdrawals from investment bonds, for example, which in in many cases are seen as a return of capital, but sort of act like an income. So we've got this broad definition from we have this broad definition from Rachel Reeves and then, yeah, John Healy and Andy Benner, like you said, have have have said, well, we will we're gonna honor that policy and we're gonna push it through, but we don't have any more detail at the moment. And given that this policy is, you know, would would have to kick in from from April next year, there's not an awful lot of time for them to to communicate what's going on.
Kyle Caldwell:So it does seem far from straightforward, but what we do know at the moment is the the government intends to shield pensioners who rely solely on the state pension. So if you have other pensions, workplace pension, for example, then and other sources of income, then you're gonna end up paying more tax as the state pension rises above the personal allowance. Now we've seen a recent pledge from reform to raise the personal allowance to £15,000 at every tax year if it wins the next election. We, of course, don't know when the next general election will be, but before k one's podcast found out that it can be held no later than the 08/15/2029. So we know that this potential tax that's gonna be implemented for lots of people on the state pension as it goes above the personal allowance, it needs to be ironed out well before then.
Kyle Caldwell:Let's now move on to wider tax considerations. It's obviously too early to say whether taxes will go up in the budget, which is gonna take place on the October 28. Though, unlike their predecessors, I think it's interesting that both Burnham and Healy, they haven't been warning of painful tax rises. However, at the same time, they also have you know, they've not been ruling them out, and they are two very different messages. Craig, if we rewind the clock back slightly to six weeks or so ago in the early stages of Burnham's premiership, it did seem back then that he was hinting at a tax court.
Craig Rickman:He was. He was there was some sort of clear sort of signaling from Burnham that he was interested in looking at the tax free personal allowance that that we've just been spoken about. It's this this this big topic and particularly looking at whether to sort of start to increase it again because it's been frozen since 2021. And the plan is for not just that allowance, but all of the tax allowances or income tax allowances to remain frozen until 2031. So he was showing some interest in in beginning to jack that up again.
Craig Rickman:He actually said that when he was speaking to his con constituents, that was one of the main things that they were talking about, the main things that they were worried about, and one of the main ways to help sort of address the cost of living. So there was a bit of noise from him early on, but that seems to have sort of cooled down a bit. He hasn't ruled out completely looking at that, but I think he's been confronted with the potential cost of of starting, yeah, starting to jack that allowance up again, which would cost sort of several several billions of of pounds a year. And so if that's a policy that he wanted to do, he would need to make sure he's had has the the sort of headroom to do it. And if not, and if he did want to still want to push that through, then he might have to look at other areas of the tax system to balance the books.
Kyle Caldwell:However, both Bayernham and Healy, they are hamstrung by the election manifesto to play pledges not to raise taxes on working people. And the fact is that lots, if not most of, you know, personal and wealth taxes have already seen reform Mhmm. During this parliament. And I've just made a a note of them. So we've got unused pension funds going to the scope of inheritance tax from next April.
Kyle Caldwell:There's been changes to capital gains tax, dividends tax, savings rates. There's been changes to property income, AIM shares related to inheritance tax, venture capital trusts, PCTs. There's also been the cut to the cash ISA that takes effect from next April from £20,000 to £12,000. There's also the proposed introduction of uninvested cash in investment ISAs, and there's also what is known as the high property value surcharge tax, which is coming into force in 2028. Essentially is the mansion tax on properties worth more than £2,000,000.
Kyle Caldwell:To me, Craig, it looks like a lot of the lemon has already been squeezed in terms of, you know, taxes.
Craig Rickman:Yeah. Yeah. Absolutely. That where would where would they go if they needed to if they did need to raise more taxes? But I think going back to the point you mentioned earlier, which I think is a is a is an important one, which is the noise from the government this time around has been different.
Craig Rickman:So we haven't been warned of a of a painful budget. We haven't been warned about tax rises. In fact, yeah, when when John Healy was was interviewed recently, he was refusing to be drawn in on anything. He was because he was saying that if I comment on the speculation, then that can then, you know, could could sort of add add fuel to the fire. That wasn't his verbatim comment, but that's what he was insinuating.
Craig Rickman:But then the the other thing on the other side to that is if if they're not if they're refusing to rule out tax rises, then it essentially leaves it leaves it open. So it's a very difficult, you know, situation for the government. But, yeah, we do we don't know whether whether taxes will rise. But as you know, as if if they are to if they are and the government does need to sort of go back to the to the the personal tax system, then then there aren't there aren't a huge amount of options. I mean, they could there have been reports of of capital gains tax rates being equalized with income tax.
Craig Rickman:We should know that these rumors these aren't sort of new rumors. They've surfaced before the the previous few budgets and for many more before that as well. Capital gains tax rates did go up a couple of years ago. Could that happen? Yes.
Craig Rickman:But there isn't really anything concrete to suggest that's gonna happen. Not yet anyway, but obviously things will change over the over the coming sort of weeks.
Kyle Caldwell:So, essentially, there aren't many levers left to pull, and we recently asked people what they would like to see from the budget on II Community, which is our social trading network. And the main thing that they said they wanted to see is leaving pension tax alone. And that really does speak volumes, doesn't it, Craig?
Craig Rickman:It really does. It shows how how scarred investors have been by the the the changes the changes to pension tax that we've seen before the previous two budgets, but also the the the speculation beforehand. So some of the things didn't materialize. Some of the big sort of speculated changes, notably around tax free cash. But the the sort of ferocity of of those rumors have have left a mark on people, and they just they they want that reassurance that that the pension tax framework is gonna remain as it is, and they can continue to enjoy the tax advantages that are available now.
Kyle Caldwell:And we'll both be back on the podcast next month to do a preview ahead of the budget, in which we'll do a roundup of the rumors and speculation that may be in the famous red briefcase.
Craig Rickman:Absolutely. Yeah. The things things will change over the coming weeks. We should have a better idea of where the government stands in relation to its self imposed fiscal rules, which will ultimately determine will will almost certainly determine whether there are there are tax changes or not, whether there are tax hikes. If you go back earlier this year, it seemed like the government had sort of quite a bit of headroom, 23,700,000,000 headroom, but apparently that has gradually been eroded by higher higher borrowing costs.
Craig Rickman:But, yeah, we should have a clear idea about where things stand and then have a better idea about what might change at the budget.
Kyle Caldwell:Craig, thanks for coming on, and thank you for listening to this episode of On The Money. We always love to hear from listeners. If you've got an idea of an investment or a pension topic that you'd like us to cover, or you've got a question that you'd like one of the team to tackle, then do email us on otm@ii.co.uk. As usual, you can find plenty of investment inspiration on the Interactive Investor website, which is ii.co.uk. And we'll be back next Thursday, so I'll hopefully see you then.