Interest Rates Down, Inflation Down, Pensioners’ Allowance Up?
Have we been quietly bamboozled by all these changes?
That may well be the impression many taxpayers are getting.
Interest rates are falling. Inflation is easing. Yet many households still feel financially squeezed.
Why? Because while headline tax rates have not increased, thresholds and allowances have often been frozen — a tactic widely described as fiscal drag.
What is Fiscal Drag — And Why Does it Matter?
The government has been accused of applying a “stealth tax” by freezing personal tax thresholds instead of allowing them to rise with inflation.
When wages increase (even modestly) but tax thresholds stay the same:
More people are pushed into higher tax brackets
More income becomes taxable
Overall tax receipts increase
Technically, tax rates have not gone up — but tax paid by individuals has.
This approach allows governments to raise revenue without formally announcing a tax rise.
And given ongoing budget pressures, increased public spending, and national debt servicing costs, additional revenue is clearly needed.
One well-known funding method has been the continued issuance of UK government bonds (gilts). However, borrowing alone cannot fill every fiscal gap.
Student Loan Changes: A Shift in the Rules?
In the Autumn Budget, significant changes were announced to Student Loan Plan 2.
Plan 2 applies to students who started university between 2012 and 2023. Originally:
Repayments were set at 9% of income over £28,470
The threshold was expected to rise annually with inflation
Many borrowers were told they were unlikely to repay the loan in full
Under the revised rules, the repayment threshold is being frozen at £29,385 (the April 2026 level) for three years rather than rising with inflation.
What does this mean?
Graduates will start repaying sooner in real terms
Middle earners will repay more over time
Higher earners are more likely to repay the loan in full
Critics argue this represents a retrospective change to the spirit of the original agreement. Some have even described the changes as “draconian,” suggesting that similar alterations would not be permitted under typical Financial Conduct Authority (FCA) standards for commercial lending.
Those who started their studies more recently may be even worse off under the newer repayment plans.
For bookkeeping professionals, this change matters because it directly affects payroll deductions and employees' net income planning.
Pensioners’ Tax Allowance: A Growing Debate
Meanwhile, a petition signed by over 100,000 people is calling for the personal tax allowance for pensioners to be increased to £25,140.
If implemented, pensioners could earn up to £25,140 tax-free.
Supporters argue this would provide fairness to retirees on modest pensions who continue working part-time to supplement their income.
The debate also links to the long-running concerns raised by the WASPI (Women Against State Pension Inequality) campaign, which affects women born between April 1950 and April 1960, who were impacted by rapid increases in the State Pension age from 60 to 65 (and later to 66), and thus often unprepared financially.
Whether Parliament will act on the petition remains to be seen. However, the issue reflects growing political pressure around pension taxation and retirement fairness.
Interest Rates and Inflation: The Bigger Picture
With inflation easing, interest rates on savings accounts are set to decline.
Lower savings returns may reduce passive income for retirees and cautious savers.
All the same, there appears to be a broader policy shift encouraging investment in equities rather than cash savings — supporting capital markets and British businesses.
ISA Changes from April 2027
From April 2027, further changes are planned to Individual Savings Accounts (ISAs):
The overall ISA allowance remains £20,000
For under-65s:
£12,000 maximum in Cash ISAs
£8,000 allocated to Stocks & Shares ISAs
This effectively nudges savers toward investing rather than holding funds purely in cash.
For bookkeepers and financial advisers, this shift will influence:
Client cash-flow planning
Investment strategies
Tax-efficient savings advice
So, Are We Better Off?
On paper:
Inflation is down
Interest rates are falling
Tax rates have not increased
In practice:
Frozen thresholds increase tax liabilities
Student loan repayment rules have tightened
Savings returns are declining
Investment risk is being encouraged
Whether these changes serve the public well depends largely on individual circumstances.
For business owners and employees alike, proactive tax planning and cash-flow forecasting are now more important than ever.
