Speculation about Rachel Reeves’ upcoming Budget continues to mount as she prepares to outline measures to address the deficit in public funds on Wednesday.
The chancellor has told the public she has no “easy choices” on Wednesday, after the Institute for Fiscal Studies (IFS) estimated she needs to find at least £22bn to fill the gap in the public finances.
The lead up to the fiscal event has been rife with rumours about what could be to come, including the expectation – and then apparent U-turn on – an increase to income tax.
It looked as if Ms Reeves would break Labour’s election-winning manifesto and increase income tax. She later abandoned that plan, following more optimistic forecasts received by the Treasury from the budget watchdog.
We already know some measures which will feature in Wednesday’s announcement. Rail fares will be frozen in the Budget, saving commuters on pricier routes more than £300 a year, and the cost of an NHS prescription in England will also be frozen at £9.90.
Ms Reeves is expected to reaffirm Labour’s commitment to the triple lock on state pensions, and confirm that 13m pensioners are set to benefit from an above inflation rise next April.
Here, we look at how other measures in the Budget could affect pensioners.
Freezing income tax thresholds
Sir Keir Starmer refused to rule out freezing income tax thresholds at the Budget, which could result in people paying more tax by “stealth”.
At Prime Minister’s Questions last Wednesday, Sir Keir declined to answer a number of questions from opposition leader Kemi Badenoch on the issue of threshold freezes.
The tax-free personal allowance was frozen at £12,570 until 2028 by the previous Conservative government. Frozen tax thresholds can be used to raise more money for the Treasury, in effect rising taxes by stealth.
Even if income tax rates are not increased, people could end up paying more tax as a result of the freezes. Freezing tax thresholds can create what economists call “fiscal drag” – more people are pulled into higher tax brackets as average earnings increase, but the thresholds stay the same.
As mentioned earlier, Ms Reeves is expected to reaffirm the government’s commitment to the triple lock on state pensions in the Budget. But frozen tax thresholds could affect a rising state pension.
The state pension has been £11,973 per year since April 2025 and, as a result of the triple lock, it is expected to rise to at least £12,578 per year in April 2027.
The triple lock means the state pension increases annually, by whatever is highest of inflation, average growth in earnings or 2.5%.
This would take it above a frozen tax-free personal allowance by 2027 and would mean tax would be paid on the state pension. The amount pensioners pay could increase in future years if the pension keeps rising.
The Liberal Democrats have called on Ms Reeves not to use lower inflation as a justification for “stealth tax”.
The party’s treasury spokesperson Daisy Cooper last week said: “As the cost-of-living crisis rages on, the chancellor mustn’t look this small gift horse in the mouth.
“Hitting people with a stealth tax at next week’s Budget would prolong the pain of higher taxes for much longer and unfairly pull poorer pensioners and low-income workers into paying tax for the first time.
“We Liberal Democrats are calling for emergency measures to slash people’s energy bills, save our high streets with a VAT cut for hospitality and boost growth in every corner of the UK – funded fairly by taxing the banks.
“The Chancellor must put households and high streets first, and put an end to the most vulnerable from having to choose between heating and eating.”
Mansion tax
The chancellor is now expected to apply a tax to homes worth more than £2m in a move which could raise between £400m and £450m for the Treasury.
Some 2.4m properties in the top three council tax bands – F, G and H – will be revalued to determine which will be subject to the surcharge, which will be worth an average of £4,500, as reported by The Times.
According to calculations from estate agent Knight Frank, just over 150,000 properties in England and Wales would fall into the mansion tax bracket today.
Tom Bill from Knight Frank said this policy, first proposed by the Liberal Democrats in 2012, could accelerate downsizing and affect pensioners.
He said: “Arguments made in 2012 that some long-term homeowners would be unable to pay the tax remain valid. It would catch out pensioners whose house has appreciated in value while their income has gone in the opposite direction.
“This, in turn, could lead to more downsizing. It may result in a more efficient use of the country’s housing stock, but assumes owners are ready or willing to leave a neighbourhood they may have lived in for decades.”
Personal savings allowance
According to The Telegraph, Ms Reeves is also expected to freeze the personal savings allowance.
The allowance means that basic rate taxpayers can earn up to £1,000 in savings interest each year without having to pay tax. For higher-rate taxpayers this falls to £500 for but additional-rate taxpayers have no allowance.
The Telegraph reports that older people will be hardest hit by this, according to savings comparison site Raisin UK. It states that over-55s have an average balance of £20,000 in their savings – more than any other age group.
In a similar way to freezing tax thresholds, freezing the personal savings allowance could result in people paying more tax by “stealth”. As savings increase, tax-free allowances have not gone up with them.
About this, Raisin UK founder Kevin Mountford, said: “Freezing the personal savings allowance for yet another year might sound like a small technical decision, but for pensioners, it’s anything but.
“These are people who’ve worked hard, saved carefully, and done everything right. Now, just as interest rates have finally started to reward savers, many are finding that their savings income is being taxed – not because they’re wealthy, but because the threshold hasn’t moved in years.
“Unlike working households, pensioners can’t pick up extra hours or ask for a pay rise.”
