The triple blocking of state pensions will drag 650,000 more retirees into net income tax
- The state pension will increase by 8.5% in April 2024
- The increase is not all good news, as many retirees face additional taxes
- Steve Webb: ‘Once again, “stealth” taxes prove a convenient way to raise revenue’
More than half a million pensioners will end up paying income tax on their state pension because of an expected 8.5 per cent rise in the benefit next year, our pensions dying uncle Sir Steve Webb warns.
An 8.5 per cent increase in state pensions looks like good news for retirees. But it also means that many will earn enough to be dragged into paying income taxes as a result.
The state pension increases every year due to a 2010 policy promise called the triple lock.
This says state pensions will rise each April at the highest level of inflation, income growth or 2.5 per cent.
Tax trap: Likely state pension increases mean more retirees will end up paying income tax
Today, the Office for National Statistics confirmed that wages, including bonuses, rose by 8.5 per cent in the three months to July, the period used for the triple lock.
This means an 8.5 per cent rise in the state pension next April is almost certain.
The only way that could change is if September’s inflation figure is higher.
The triple lock will weigh the September inflation figure, announced at the end of October, and compare it with that 8.5 percent to calculate next year’s state pension increase.
But it is highly unlikely to exceed 8.5 percent, as inflation was 6.8 percent in July, down from 7.9 percent in June.
An 8.5 per cent increase means state pensioners would receive an extra £9bn a year.
The new state pension, for men born on or after April 6, 1951 or women born on or after April 6, 1953, will rise by £902.20 a year to around £11,500.
These state pensioners will receive £221.20 per week, an increase on their current salary. £203.85.
Pensioners receiving the basic state pension, those who reached state pension age on or before April 5, 2016, will receive £169.50 a week, up from £156.20.
Britons pay income tax on income over £12,570 a year.
Steve Webb, partner at consultancy LCP and former Pensions Minister, said an 8.5 per cent rise in state pensions would “lead many more pensioners into paying income tax”.
Figures from HM Revenue & Customs show the number of pensioners paying income tax rose from 7.73 million to 8.5 million between 2022/23 and 2023/24.
If the state pension increases by 8.5 percent, that means 650,000 more pensioners will start paying income taxes, LCP said, or about 9.15 million people.
Will the triple lock survive?
Several governments have toyed with the idea of eliminating or easing the triple lock since its launch in 2010.
But eventually everyone decided to keep it, except for the 2022/23 year, when the triple lock became a double lock due to earnings growth being removed from the formula.
The Government made that decision to ease the pressure on the economy during the pandemic and reinstated the triple lockdown for the current fiscal year 2023/24.
But despite the cost pressures on the Government, LCP’s Webb said the triple lock is likely to remain in place.
Changing the triple lock again would be politically damaging and would also require the enactment of new laws.
Webb added: ‘Once again, “backdoor” taxes prove to be a convenient source of income for the Chancellor.
‘In terms of the triple lock policy, with a general election in sight, it seems quite inconceivable that the Government would decide to break the promise of the triple lock for the second time in three years.
‘Such a decision would be like aiming a laser-guided missile at the core of Conservative support and could fatally undermine the party’s electoral prospects.
‘What is much less clear is what each party will do when it comes to its manifesto.
‘There is no doubt that both the current government and the opposition would like to leave politics so they can save and spend it on other things.
“But they both want to avoid a situation where they acted first by releasing the triple lock and discovering that the other party has held it.”
What is the current state pension?
The full state pension is currently £203.85 a week or £10,600 a year.
People who retired before April 2016 on a full basic state pension receive £156.20 per week or £8,120 per year.
The old basic rate is supplemented by additional state pension entitlements (S2P and Serps) if they were earned during years of work.
People who have taken out S2P and Serps to pay less into National Insurance over the years and retire after April 2016 could receive less than the new full state pension.
Workers now need to have 35 years of contributions to get the new fixed-rate state pension, compared to 30 years of qualifying National Insurance contributions to get the old state pension.
But even if you paid in full for 35 years or more, if you contracted for a few years, you could still reduce what you get.
Everyone has the option of deferring their state pension to get more in their later years and can buy state pension top-ups to fill the gaps.