How will change in UK prime minister impact tax and pensions?

Triple lock and unfreezing thresholds could be on the agenda for Boris Johnson’s successor

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The next prime minister of the UK will be announced on Monday 5 September. The options for the Conservative Party voters are Liz Truss and Rishi Sunak.

The polls suggest that Truss is a dead cert to become the next PM and succeed the departing Boris Johnson.

But whoever takes over will need to get to work quickly and offer support to households and businesses facing often catastrophic increases in energy bills.

There is also talk that the next PM will look to make quick changes which could affect personal finances, pensions and/or investments.

This could be an immediate announcement or as part of an emergency Budget, possibly later in September.

Steven Cameron, Aegon pension director, has explored the different areas which could be affected by the arrival of a new UK prime minister.

Cost of living and inflation

Cameron said: “The nation awaits news on how the government will offer future support to consumers and businesses as the cost of fuel continues to skyrocket leading to some predicting inflation reaching 18% or more early next year.

“If the energy price cap continues to jump up every three months, the question is who will receive Government support and to what extent.

“The alternative believed to be under consideration is to freeze energy prices with no further increase in the cap, supported by a funding deal between government and energy companies, with the shortfall repaid longer term, possibly through income and other taxes.

“One key difference under this approach is it may avoid the headline inflation rate rising ever higher. While this may offer welcome reassurance to many, it could have implications for state benefits which are uprated in line with inflation, including the state pension.”

Pension triple lock

A big area for the Conservative Party has been its position on the pension triple lock.

Secretary of state for work and pensions Therese Coffey reiterated the government’s commitment to reinstate the triple lock in the 2023-24 financial year.

This comes after the UK government temporarily moved to a ‘double lock’ of the higher of price inflation or 2.5%, excluding earnings growth from the April 2022 increase, because of pandemic-related distortions in national average earnings.

Cameron added: “Both candidates have in the past committed to retain the state pension triple lock until the next general election. This grants an increase of the highest of consumer price inflation, national average earnings increases or 2.5% each year. Inflation is already in double figures and could rise further before the crucial figure for September is announced mid-October.

“Some workers may question the fairness of a 10% or above increase for pensioners when they are receiving far lower wage increases. However, state pensioners got far less than the rate of inflation last April and could find their purchasing power is further worsened if inflation continues to rise, with some predicting it could be 18% early next year.”

Unfreezing tax thresholds

Back in 2021, to help recoup the costs of covid support, the UK government announced an income tax threshold freeze until 2026.

This included the level of earnings when people start paying both basic and higher rate income tax. These thresholds would usually have increased in line with inflation each year, but the freeze means that as individuals’ earnings rise year-on-year, they pay income tax on a greater proportion of their incomes, in some cases dragging more people into paying higher rate tax.

Cameron said: “This was designed to gradually collect more tax revenue, and at times of low inflation, might have gone largely unnoticed. In 2021, no-one could have predicted today’s skyrocketing inflation, and while wage increases have been lagging behind rising prices, the impact is now very significant.

“In the current cost-of-living crisis, it would be extremely hard to justify keeping the freeze for the full five years originally planned. While it would be difficult to make changes immediately, an announcement to end the freeze and start to increase thresholds again from next April, might be included in an emergency Budget.

“While of lower immediate priority, other thresholds and limits which were also frozen are causing issues elsewhere. For example, the pensions ‘lifetime allowance’, the maximum you can have in your pension before incurring a tax charge, has been frozen at £1,073,100 ($1,249,576, €1,250,595).

“While this may seem a lot, keeping it frozen for five years will mean many more individuals who’ve done the right thing and saved for their retirement could face a tax penalty when they come to take their pension benefits.”

Pension investments

Cameron added that the new prime minister “will want to take advantage of being free from EU rules to make it easier for pension schemes to invest in a wider range of investments”.

“One particular focus has been on encouraging greater investment in ‘unlisted’ assets such as long-term infrastructure projects which can support a move to net zero, create greater economic growth and also hopefully produce higher returns for pension savers,” he added.

“The government won’t force changes here, but if the rules are relaxed, you may find your workplace pension gradually changes where your funds are invested.”

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