The Coventry Building Society has issued a stark warning to its customers who are state pensioners, cautioning that they could end up paying significantly more income tax to HMRC.
The Looming Budget Changes
This alert comes amid reports that Chancellor Rachel Reeves is planning to raise £7.5 billion by freezing income tax thresholds in the upcoming budget. Jeremy Cox, the Head of Strategy at Coventry Building Society, emphasised that pensioners and others relying on fixed incomes are particularly vulnerable to these proposed changes.
Mr Cox explained that while retirees will be relieved if direct income tax rates are not increased, the stealthy approach of freezing thresholds and potentially reducing Cash ISA allowances will have a similar, painful effect. "Many could end up paying more income tax anyway, including on their cash savings," he stated.
The Hidden Tax Rise for Millions
The core of the issue lies in the frozen income tax thresholds. With thresholds held steady while incomes and savings interest rise, many more individuals are pulled into higher tax brackets.
"With income tax thresholds frozen, many more people were already in line to be higher rate taxpayers next year," Mr Cox elaborated. "Dropping the threshold further will mean millions more will start paying tax at 40 per cent."
This creates a severe sting for savers. For a higher-rate taxpayer, the amount of interest they can earn from cash savings before having to pay tax on it is slashed in half from £1,000 to just £500, unless those savings are already protected within an ISA.
Broader Consequences and Expert Warnings
The financial instability is not limited to pensioners. The proposed changes could also create a ‘cliff edge’ for benefits and allowances like child benefit and childcare, making long-term financial planning exceptionally difficult for many families.
This sentiment is echoed by other financial experts. John Clamp, a chartered financial planner at Bowmore, noted that such threshold freezes effectively constitute "annual tax rises without many taxpayers even realising."
Furthermore, Helen Miller, the director of the influential Institute for Fiscal Studies (IFS), expressed a separate concern. She warned that if the government avoids politically challenging direct tax hikes, it may resort to other, less transparent revenue-raising methods. Ms Miller cautioned that financial markets could interpret this reluctance as a sign of weakness, potentially causing investors to "demand higher returns when lending to the Government."
The collective message from Coventry Building Society and financial analysts is clear: the impending budget changes pose a significant threat to the financial security of state pensioners and fixed-income households across the UK.
