Key tax and pension issues in Andy Burnham’s in-tray

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This week, the focus is on the key tax and pension issues in new Prime Minister Andy Burnham’s in-tray now that the Makerfield MP has had some time to size up the tasks at hand. Joining Kyle to discuss these topics, including the triple lock, is interactive investor’s personal finance editor Craig Rickman.

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Kyle Caldwell, funds and investment education editor at interactive investor: 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 Burnham’s in-tray now that the Makerfield MP has had some time to size up the tasks at hand. 

He’s already introduced some measures, mainly focused on helping households with the rising cost of living, and he and Chancellor John Healey 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 going to start off with pensions, and specifically, the triple lock, which once again at the time of this recording, is front-page news, with the British Chamber of Commerce (BCC) urging Healey to abandon the triple lock and instead increase the state pension in line with inflation. It 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 uprates the state pension every year by the highest of inflation, wage growth, or 2.5%. So, Craig, could you first explain why there is lots of debate over the future of the triple lock?

Craig Rickman, personal finance editor at interactive investor: Sure, yeah. So, it certainly is an incredibly divisive policy. In fact, gov.co.uk ran a poll earlier this year, surveying Labour Party members, and asking them: ‘What do you want to happen to the triple lock? Should it be kept? Should it be scrapped?’ And the results were split fairly evenly, slightly in favor of scrapping the policy, which illustrates the division on it and where people stand. 

In terms of the cause to scrap it, which as you know have been mounting for some time, it is around the cost and it’s essentially becoming far too expensive to run because it means the state pension will increase by the highest of those three metrics, whichever is the highest during any given tax year. And so there are concerns that the longer it’s kept, that it’s going to become too expensive, far too expensive to run. So, that’s the argument for getting rid of it.

On the other side to that, there are lots and lots of people in retirement, pensioners, who rely heavily on the state pension to make ends meet. And so scrapping the policy at this point, especially during a period where the cost of living is still rising a lot higher than the government would like, could cause problems for those groups. So, that’s the two sides of the argument. 

In terms of where the government is on it, within its election manifesto, they promised to keep the triple lock for this parliament. So I see no reason why that will change.

Essentially, 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. Its future, and any future decisions around it, lie beyond that date.

Kyle Caldwell: I agree. I think the proverbial can will continue to be kicked down the road. At some point, the sustainability of the triple lock needs to be looked at very closely as the UK population continues to age. I 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 the time to look at it, because ultimately you are going to upset a lot of people if you make any changes, and you are going to lose some, or a large proportion, of the so-called grey vote.

Craig Rickman: Absolutely. I guess the other side to that is if the government is going to replace the triple lock, what do they replace it with? There have been various ideas that have been put forward. If we go back a few years, during Covid, the government actually introduced a double lock for a one-year period and they suspended the triple lock element. So, that’s one option. 

But there’s been various options put forward. So, that’s something for the government to think about, what exactly is going to replace it before you consider scrapping it.

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Kyle Caldwell: Now let’s move on to something in the in-tray that’s 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, first, how did we get to this situation?

Craig Rickman: Yeah, sure. So it’s been driven by a couple of factors, really. One that we’ve just been speaking about, which is 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.

So, this economic phenomenon is called fiscal drag, so the various income tax and national insurance thresholds have been frozen since 2021 and will remain that way until 2031. If we go back to 2021, the full state pension paid around £9,300 a year. The personal allowance was £12,570, which is the same as what it is today. Fast forward to today and the 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 personal allowance.

If you go back to 2021, that meant that even if you got the full state pension - you could have other forms of taxable income that might have been from defined benefit schemes, annuities, and/or drawdown withdrawals - you still had some personal allowance spare, so you wouldn’t necessarily pay tax on all that income. 

But over time, due to the increases that has now disappeared, and from April next year 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 - are looking just above the 4% mark, so that’s the increase that it’s likely to drive. 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 a new problem for everyone. There are quite a lot of people who receive income above the state pension for various reasons, for various extras that they’ve accumulated over the years.

But it’s still a big thing that the full state pension amount will breach the tax-free threshold for the first time.

Kyle Caldwell: As you mentioned, people in government will have known that with the tax thresholds frozen and state pension increases, at some point, it was going to happen and the state pension would go above the tax-free personal allowance. So, it’s not as if it’s not been on their radar for some time. 

If you go back to the autumn Budget in 2025, Rachel Reeves outlined a policy to protect some pensioners from facing this future tax bill next April. Reeves said that ‘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’. This is a promise that both Healey and Burnham have said they’ll push through as well. However, there are some complications to that.

Craig Rickman: There are. There’s quite a lot to unpack within this. The first thing to say is that any kind of policy that looks to support those on lower incomes, in this case it’s those who are in retirement, but anyone across any demographic across the population should be welcomed. However, there's a lot to unpick, and this could be quite a complicated policy.

At the moment, we don’t know any more than that statement that you’ve just read out from Reeves, saying that if it’s your sole form of retirement income without any increments - and that’s a bit that we’ll touch on - that you won’t pay any tax on it. So, where are the complications? 

I guess the first thing is that part without increments. 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, or you’ve got extra benefits, 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 unfairness because you could essentially have two people on the same level of income, but because of the technical definition, one might pay tax on their state pension, the other may not. So, that’s a contentious point, and again, that’s something that we need to know a bit more detail about. 

The other is this idea of what would you classify as income? Does this mean just taxable income? Does it mean income that isn’t taxed? For example, ISAs. Where would it leave other things such as withdrawals from investment bonds, for example, which in many cases are seen as a return of capital, but act like an income. 

So, we had this broad definition from Reeves and then Healey and Burnham, like you said, have said they are going to honour that policy and push it through, but they don’t have any more detail at the moment. Given that this policy would have to kick in from April next year, there’s not an awful lot of time for them to communicate what’s going on.

Kyle Caldwell: It does seem far from straightforward, but what we do know at the moment is that the government intends to shield pensioners who rely solely on the state pension. So, if you have other pensions, workplace pensions, for example, and other sources of income, then you’re going to 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 if it wins the next election. While we don’t know when the next general election will be, before I came on this podcast I found out that it can be held no later than 15 August 2029. 

So, this potential tax that’s going to be implemented for lots of people on the state pension as it goes above the personal allowance needs to be ironed out well before then.

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 going to take place on 28 October. Although, unlike their predecessors, I think it’s interesting that both Burnham and Healey haven’t been warning of painful tax rises. However, at the same time, 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 cut.

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Craig Rickman: He was. There was some clear signalling from Burnham that he was interested in looking at the tax-free personal allowance that we’ve just been spearking about. It’s this big topic and particularly looking at whether to start to increase it again because it’s been frozen since 2021. 

The plan is for not just that allowance, but all the income tax allowances to remain frozen until 2031. So, he was showing some interest in beginning to jack that up again.

He actually said that when he was speaking to his constituents, that was one of the main things that they were talking about, one of the main things that they were worried about, and one of the main ways to help address the cost of living. 

So, there was a bit of noise from him early on, but that seems to have 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 starting to jack that allowance up again, which would cost several billions of pounds a year. 

So, if that’s a policy that he wanted to do, he would need to make sure he has the headroom to do it. And if not, and if he did 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 Burnham and Healey are hamstrung by the election manifesto that pledges not to raise taxes on working people. The fact is that lots, if not most, personal and wealth taxes have already seen reform during this parliament. I’ve made a a note of them. 

So, we’ve got unused pension funds coming into the scope of inheritance tax from next April, there’s been changes to capital gains tax, dividends tax and savings rates. There’s been changes to property income, AIM shares related to inheritance tax, and venture capital trusts (VCTs). 

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’s known as the high property value surcharge tax, which is coming into force in 2028. Essentially, it is the mansion tax on properties worth more than £2 million.

To me, Craig, it looks like a lot of the lemon has already been squeezed in terms of taxes.

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Craig Rickman: Yeah, absolutely that. Where would they go if they did need to raise more taxes? But going back to the point you mentioned earlier, which I think is an important one, the noise from the government this time around has been different.

We haven’t been warned of a painful Budget. We haven’t been warned about tax rises. In fact, when John Healey was interviewed recently, he was refusing to be drawn on anything. He said that if he commented on the speculation that could add fuel to the fire. That wasn’t his verbatim comment, but that’s what he was insinuating.

But then on the other side of that is that if they’re refusing to rule out tax rises, then it essentially leaves it open. It’s a very difficult situation for the government, but yeah, we don’t know whether taxes will rise. But if they are, and the government does need to go back to the personal tax system, then there aren’t a huge amount of options. 

There have been reports of capital gains tax rates being equalised with income tax. These aren’t new rumours. They’ve surfaced before 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. But there isn’t really anything concrete to suggest that’s going to happen. Not yet anyway, but obviously things will change over the coming weeks.

Kyle Caldwell: So, essentially, there aren’t that many levers left to pull. We recently asked people what they would like to see from the Budget on ii Community, which is our social trading network. The main thing they wanted was for pension tax to be left alone, and that really does speak volumes, doesn’t it, Craig?

Craig Rickman: It really does. It shows how scarred investors have been by the changes to pension tax that we’ve seen before the previous two Budgets, but also the speculation beforehand. Some of the things didn’t materialise. Some of the big speculated changes, notably around tax-free cash. 

But the ferocity of those rumours have left a mark on people, and they want that reassurance that the pension tax framework is going to remain as it is, and that they can continue to enjoy the tax advantages that are available now.

Kyle Caldwell: We’ll both be back on the podcast next month to do a preview ahead of the Budget. We’ll do a round-up of the rumours and speculation of what may be in the famous red briefcase.

Craig Rickman: Absolutely, yeah. 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 almost certainly determine whether there are tax changes or not, and whether there are tax hikes. 

If you go back earlier this year, it seemed like the government had quite a bit of headroom - £23.7 billion headroom, but apparently that has gradually been eroded by higher borrowing costs. But, yeah, we should have a clearer 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. We’ll be back next Thursday, so I’ll hopefully see you then.