To Size Up the Tax Hike and ‘Triple Lock’ Change, Tune Out Political Rhetoric

The UK government’s new measures are small relative to the amount of political rhetoric they stirred, in our view.

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This week, UK Prime Minister Boris Johnson triggered a flood of angst-laden headlines in financial publications we follow when he unveiled the government’s plan to hike various taxes, chiefly to support the NHS. The government also revealed plans to revise the state pension’s triple lock cost of living adjustment—a plan the government passed Wednesday evening. This move met withering criticism amongst financial headlines we reviewed—from both sides of the political aisle: Some pointed out the moves violated promises from the Tories’ 2019 election manifesto, whilst others alleged the scope of tax hikes is too small to provide the funding needed. Maybe there is truth to these points. Maybe not. Either way, for investors, we think those politicised narratives are a distraction. There are personal finance developments here to note, but overall, we think these changes are quite small relative to the rhetoric.


First, here is a quick look at the chief developments. The change will increase the National Insurance tax by 1.25 percentage points starting in April 2022.[i] This payroll tax, paid by both employers and employees, will apply to all working adults—no exclusions for those above pension age. Further, the plan hikes dividend taxes by the same margin. On the health benefits side, the plan caps lifetime contributions to medical care at £86,000 starting in October 2023 and eliminates payments for those with under £20,000 in assets. Brits with assets between £20,000 and £100,000 will pay for some of their care, but get a means-tested government benefit to offset some of the cost.

The ‘Triple Lock’

On the pension side, the triple lock appears somewhat unlocked, at least for 2022 and 2023. Before this law, the state pension was supposed to rise by the highest of:

  • The year-on-year change in the Consumer Price Index (CPI) or
  • 2.5% or
  • The average wage increase

The new plan deletes the third option for next year and 2023, returning thereafter. In introducing the move, Work and Pensions Minister ThérèseCoffey cited statistical irregularities that were greatly inflating the average wage increase.[ii] Those irregularities amount to base effect skew, in which the last 18 months’ unique circumstances depress the denominator used in calculating average wage changes.[iii] Because of temporary furloughs, our research shows many workers saw a dire hit to wage income. Similarly, we found that as lockdowns ended, many furloughs did too, boosting wage income suddenly and dramatically. The upshot: The triple lock’s average wage provision could have sent pensions up by as much as 8.8% next year, using the Office for National Statistics’ average weekly earnings in the three months to June.[iv]

In assessing these moves, we saw many commentators note that the triple lock’s revision violates a Tory pledge from 2019’s manifesto. On the tax side, some analysts we follow not only cited this, but also the regressive nature of payroll taxes like the National Insurance tax—they hurt low-earners more than high earners, as those making lower earnings have less margin to spare. Still other experts we cover argued the tax won’t raise enough funds to materially bolster the NHS’s capabilities. We won’t take part in this debate—it is policitised, in our view, as tax hikes and pension revisions often are worldwide, in our experience.

From a pure personal finance perspective, tax hikes aren’t great, in our view. We also generally subscribe to the view higher taxes are suboptimal economic policy, as our research shows politicians can allocate spending in counterproductive ways that mostly serve to create winners and losers. But, the thing is, these measures seem relatively small to us. According to the Associated Press:

The increase, which takes effect in April, will cost someone paid 21,000 pounds a year about 180 pounds more on their annual tax bill. High-earners paid 67,000 pounds a year will pay more than triple that.[v]

Using these estimates, a worker paid £21,000 annually in 26 biweekly cheques would see each cheque fall by about £7. That may not be great for taxpayers, but even tripling that for higher earners doesn’t seem catastrophic. We don’t think this is anywhere near the magnitude necessary to sway markets. Those with tight budgets may, unfortunately, feel a pinch. But the macroeconomic impact will likely be small, in our view.

As for the pension change, this doesn’t actually cut incomes—it simply means they likely won’t rise by as much as they could have. We doubt this has much macroeconomic effect.

To us, the furore over these measures in financial publications we follow seems like politics influencing a relatively minor change from a personal finance perspective. We think these changes are worth being aware of, but don’t overrate them.

[i] “Record £36 Billion Investment to Reform NHS and Social Care,” UK Prime Minister’s Office, 7/9/2021.

[ii] “UK Will Not Raise State Pension In Line With Wages Next Year – Minister,” David Milliken, Reuters, 7/9/2021.

[iii] See note ii.

[iv] Ibid.

[v] “UK Leader Johnson Gambles on Tax Hike to Pay for Elder Care,” Jill Lawless, Associated Press, 7/9/2021.

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