UK state pension will surpass income tax threshold next year
Some older people whose only income is the state pension will be paying income tax for the first time
The UK state pension is set to rise above the tax-free income threshold for the first time, adding to the fiscal challenges facing chancellor John Healey ahead of October’s Budget.
Earnings data published on Tuesday showed that wages had risen by 3.9 per cent, meaning that the state pension is on track to rise by the same percentage under the terms of the so-called triple lock.
That will take the state pension above £13,000 a year, more than the current threshold of £12,570 above which income tax becomes payable.
The triple lock mechanism holds that the state pension rises each year by whichever is higher of CPI inflation, average earnings or 2.5 per cent.
The policy, in place since 2011, has contributed to a steady increase in state spending on pensions as a share of GDP, from 4.3 per cent in 2010 to 4.9 per cent at present.
The Institute for Fiscal Studies estimates annual state pension spending is £16bn higher than it would have been without the triple lock.
The boost expected from next April means some older people whose only income is the state pension will be pushed into paying income tax for the first time.
Rachel Reeves, the previous chancellor, had pledged to keep the state pension out of tax, putting pressure on her successor, Healey, to raise the tax-free allowance, which has been fixed since 2021, or find an alternative workaround.
Such a “tax amnesty” will protect only one in 16 retirees, according to former pensions minister Sir Steve Webb, now a partner at consultants Lane Clark & Peacock.
Webb said: “Those on the new state pension can expect to see an increase of nearly £500 per year next April.
“But the sting in the tail is that this will take the standard rate of the new state pension above the tax threshold.”
He warned that the government’s plans were a “mess”, adding: “They will also create unfairness between different groups of pensioners and between pensioners and low-paid workers, who do not qualify for any exemption.”
Total wage growth, including bonuses, stood at 3.9 per cent in the quarter to July, according to Office for National Statistics data.
The figures are subject to revision and the eventual state pension increase will also take into account whether inflation exceeds earnings.
Data due on Wednesday is expected to show consumer price inflation rose to 3.1 per cent in August but the pension uprating will be based on the following month’s data, published in October.
UK borrowing costs have already soared to the highest level since before the 2008 financial crisis, with 10-year gilt yields exceeding 5.3 per cent.