David Robbins, Director at WTW, said: “Higher income tax rates would have been a raid on the pension saving that people have done already. Post-tax income from pensions already in payment would have been lower and savers coming up to retirement would pay more on the taxable three-quarters of their pots. Some reports suggest that the Chancellor might cut tax thresholds instead, in which case the number of higher and additional rate taxpayers – already 8 million – would rise further. If that were to happen, more people could expect to pay substantially lower tax by deferring income until retirement, when they might be in a lower tax band. But more higher rate tax relief would make tax relief on pension contributions appear more expensive and lead to more speculation ahead of future Budgets. Uncertainty about future tax rates and thresholds underlines that, although people can expect meaningful fiscal rewards for saving in a pension, the precise size of these rewards is unknown until the associated retirement income has been received. Tempting as it might be to present tax relief as a simple top-up to the money that people save from post-tax income, this is far from the whole story.”
Charlotte Kennedy, Chartered Financial Planner at Rathbones, says: “Reports that the Chancellor is set to abandon plans to raise income tax are jarring, especially after her recent pre-Budget speech seemed to signal an increase. The government still has a multi-billion-pound fiscal black hole to plug, and the reported move could put other unsavoury tax changes back on the table. The harsh reality is that taxpayers’ income tax burden is already increasing because of the deep freeze in thresholds, which pushes people into higher tax brackets as their earnings rise. With less than two weeks to go until Budget Day, a smorgasbord of ideas is being tested on the public ahead of the fiscal event. A recent Rathbones survey of more than 3,000 UK adults revealed that potential changes to pensions, income tax and inheritance tax regimes are the leading concerns ahead of the Budget. Amid the uncertainty, it remains sensible to avoid knee-jerk reactions and irreversible decisions that could undermine your financial resilience."
Hal Cook, senior investment analyst, Hargreaves Lansdown: “The news that Labour may be U-turning on their planned income tax increases has sparked a wide ranging sell off in gilts this morning. Investors have been worried about the UK’s deficit for some time, which has pushed gilt yields higher, particularly longer-dated yields. Since the start of October, these had been falling, partly linked to the expectation that the upcoming Budget would have a meaningfully positive impact on the long-term debt dynamics for the UK. Increases in tax are deemed to be a big part of the plan to tackle the deficit. So, the news that the likely income tax rises have been scrapped hasn’t gone down well with gilt investors. Gilt yields of all maturities have spiked this morning, meaning prices have fallen. At the time of writing, the yield on 10-, 20- and 30-year gilts have all spiked around 12 basis points. Longer-dated gilts have therefore seen larger price falls, even though the yield change is the same (because the higher yield will be paid for a much longer period of time, meaning today’s price has to change by a larger amount). As is often the case with quick reaction to surprising news, it’s likely that these moves are over-reactions and yields definitely have potential to come back down from here. Just because Labour may no longer be planning on increasing income tax, we don’t yet know what they may plan to do instead. Government bond markets definitely have the power to keep government budgets in check, as we saw in the UK with the Truss mini-Budget in 2022 and in the US around Liberation Day earlier this year. Watch this space.”
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