Pensions rise and tax pressures increase
What the new financial year means for households.
A range of benefit increases has come into effect at the start of the new financial year, bringing higher payments for millions of households. Alongside these changes, wider policy shifts, including frozen tax thresholds, mean many families may still feel financial pressure despite the uplift.
One of the most significant developments is the removal of the two-child benefit cap. For nearly a decade, parents claiming Universal Credit or tax credits could only receive support for their first two children. That restriction has now been lifted, allowing larger families to claim for all eligible children.
The change is expected to benefit around 480,000 families with three or more children, with an average annual increase of £4,100. For some households, this translates into a meaningful boost to monthly income, helping to offset ongoing cost-of-living pressures.
Universal Credit and benefit increases
Under the updated system, the child element of Universal Credit will rise automatically from May, meaning eligible families do not need to reapply. In some cases, households could see increases of close to £300 per month per child, depending on their circumstances.
In addition, the standard Universal Credit allowance is increasing. According to estimates from the Institute for Fiscal Studies, around three million families will receive an average uplift of £120 over the year.
Other benefits have risen as well. Payments such as Personal Independence Payment, Attendance Allowance, Disability Living Allowance and Carer’s Allowance have all increased by 3.8%, in line with inflation. These adjustments are designed to maintain the real value of support as prices rise.
However, not all changes are positive. The health element of Universal Credit, which supports those whose ability to work is limited by disability or long-term illness, is being halved for new claimants. Existing recipients, numbering around 2.8 million, will not be affected by this cut.
State pension rises under triple lock
The state pension has also increased, rising by 4.8% in line with average earnings under the Government’s triple lock policy.
For those who reached state pension age after April 2016, the full new state pension is now £241.30 per week, equivalent to £12,547.60 per year. This represents an annual increase of £574.60.
Those on the older basic state pension, who reached pension age before April 2016, will now receive £184.90 per week, or £9,614.80 per year, an increase of £439.40.
To receive the full state pension, individuals typically need 35 qualifying years of National Insurance contributions. At the same time, the state pension age continues to rise gradually, moving from 66 to 67 over the next two years.
Tax freezes and wider financial impact
Despite the rise in benefits and pensions, other policy decisions may reduce the overall financial benefit for many households.
Income tax thresholds remain frozen and are now set to stay at current levels until 2031. As wages increase, more people are pulled into paying tax or pushed into higher tax bands. This process, often referred to as “fiscal drag”, increases Government revenues without changing headline tax rates.
While the approach helps fund public services, it effectively reduces take-home pay over time. Economists often describe this as a “stealth tax” because its impact is gradual and less visible than that of direct rate increases.
Alongside these changes, the new financial year also brings adjustments to other areas, including inheritance tax rules for agricultural assets, dividend taxation, venture capital trust relief, and homeworking tax relief.
Taken together, the picture is mixed. Many households will welcome the immediate boost from higher benefits and pensions, particularly those with larger families; however, ongoing tax freezes and targeted cuts elsewhere mean the broader financial outlook remains finely balanced.
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