Chancellor must find £100m extra in Budget for state pensions after key figure is revised

The Government’s state pension bill will rise by a further £100m after an adjustment to the key income figure that determines payments from next April.

Older people are now set to receive a £475 rise in their flat-rate state pension, up to around £11,975 a year.

This is around £15 a year more than the state pension rise projected last month, but enough to cause an extra headache for Chancellor Rachel Reeves ahead of the October 30 Budget.

It would boost the weekly rate from the current £221.20 to an estimated £230.25 from next spring for people retiring from April 2016 and qualifying for the full state pension.

People who retired before April 2016 on the old basic state pension currently receive £169.50 a week or around £8,800 a year.

The newly adjusted rate for next year would leave them with £176.45 a week, or around £9,175 a year.

Those on the lowest base rate also receive considerable top-ups, called S2P or Serps, as long as they have been earned earlier in life. However, these are increased in line with inflation, not the triple lock.

The triple lock means the state pension increases each year by the highest inflation, average wage growth or 2.5 per cent.

The reason for the small but costly upward revision to next year’s state pension is that the earnings growth in the crisis period used in the triple lock calculation was originally estimated at 4 percent.

However, the Office for National Statistics has reassessed this figure to 4.1 per cent in new data published this morning.

The salary growth figure is virtually the same as the one used to establish the triple lock in the spring.

This is because the corresponding inflation figure, which will be published tomorrow, is expected to be much lower. Last month it was 2.2 percent.

The new Government promised during the elections to maintain the triple blockade for the entire current parliament.

“A slightly higher rate of increase is welcome for pensioners, although it will mean an unwanted extra cost of £100m for the Chancellor as she prepares her budget,” says Steve Webb, former Pensions Minister and now This is Money’s retirement columnist. .

Webb, who is also a partner at pensions consultancy LCP, adds: ‘The rate of the new state pension will now approach £12,000 a year, very close to the £12,570 tax-free personal allowance.

“This is likely to put additional pressure on the Chancellor to take action on tax relief in the coming years.”

The personal allowance of £12,570 is the level at which income tax comes into force and has been frozen since 2021.

It creates an anomalous situation in which the Department for Work and Pensions pays millions of people a state pension, part of which is then recovered by the Treasury in income tax, potentially forcing increasing numbers to submit annual tax returns to HMRC.

Millions of pensioners already do so because they receive a state pension of more than £12,570.

This is because they reached state pension age under the old pre-2016 system and earned enough second state pension, also known as Serps, to accumulate more generous payments in retirement.

Meanwhile, an increasing number of pensioners who receive even a modest income from private pensions in addition to the state pension also have to file a tax return.