Reeves’ big freeze in the Budget receives frosty reception

In the midst of so much speculation and fearmongering, I was reminded of the old joke about the economists –they’ve successfully predicted nine out of the last five recessions. If you foretell doom sufficiently often, you may sometimes be correct but you may often be wrong.

This is why we at Calton act on what we know and build financial plans that are reviewed annually and devised for the long term.

In the event, this Budget has come and gone without immediate, seismic changes. The effects of its main measure, the extension of the freeze on tax thresholds, will be felt just as we’re going into the 2029 election. But what we got on Wednesday was an increase in tax, an increase in spending, a rise in fiscal headroom, and a reduction in projected growth.

Stability, investment, reform were the watchwords on Wednesday, but they were only the most tepid of messages.

The big freeze

Extending the freeze on all tax thresholds for not just two years (as advertised) but for three (until 2031) has two consequences for the government. First, on the flimsiest of technicalities, Labour keeps its manifesto pledge not to raise taxes on working people. Second, the freeze raises revenue for the Treasury because, over time, inflation and pay rises will drag people over thresholds into higher tax brackets.

The consequence for working people is that many more will become higher-rate taxpayers, with the tax burden rising to a record high of GDP.

What didn’t happen

In pensions, speculation was especially fervid about a “raid” on pensions, with rumours about a cap on tax-free cash causing the most dread. The worst did not come to pass, but plenty of people took pre-emptive action. Statistics released by pension providers already show an increase in outflows over the past months.

While some of these withdrawals will have been actioned as part of a broader financial plan, it’s highly likely that many people will now have cash sloshing around outside its pension wrapper and they will not be able to put it back.

You could say that this was a dog that didn’t bark in the budgets of either 2024 or 2025 – I suspect that by next autumn we’ll be wondering once again whether it will find its voice.

And what did

But some significant things did happen in pensions. Unsurprisingly, the state pension increased by4.8 per cent, in accordance with the triple lock, bringing the annual payment to £12,547.60 – just below the personal allowance of £12,570. From April 2027, this income will use the personal allowance before any dividend, rental or savings income ensuring that income tax is not levied on the State Pension.

Salary sacrifice became the sacrificial lamb in the pensions sphere. From April 2029, salary sacrificed pension contributions above an annual £2,000 threshold will no longer be exempt from National Insurance.

The change will hit employers harder than employees due to the difference in contribution rates (15 per cent for employers versus 2 per cent for higher-rate taxpayers).It is estimated this will raise £4.7 billion for the Treasury, but the long lead-in may lead to firms restructuring their pay and pensions.

No matter what, this is likely to have an impact on private pension contributions and removes an incentive to maximise saving for retirement.

Change to ISA allocation

It’s no secret that the government would like to see the money paid into Cash ISAs turned towards investment, so the change in the way the annual £20,000 ISA allowance is allocated comes as no surprise.

From April 2027, only £12,000 can be paid into a Cash ISA and the remainder must be paid into an investment ISA. The over-65s retain the full Cash ISA allowance.

While this means that ISA arrangements will need to be reviewed for some clients, it should bring better returns for those with longer investment horizons.

A consultation period on the Lifetime ISA is also announced for 2026, which is likely to bring changes to savings incentives for first-time buyers.

As ever, we at Calton will be reviewing the potential impacts of these changes with our clients at their next annual review.

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