The three-fold increase in the state pension will include 650,000 more pensioners in income tax
- The state pension is set to rise by 8.5% in April 2024
- The increase is not all good news, as many retirees face additional taxes
- Steve Webb: “Once again, “stealth” taxation proves to be a convenient source of income.”
More than half a million pensioners will end up having to pay income tax on their state pension as pensions are expected to rise by 8.5 per cent next year, warns our pension-fearing uncle Sir Steve Webb.
An 8.5 percent increase in the state pension sounds like good news for pensioners. But it also means that many earn so much that they are forced to pay income taxes.
Because of a 2010 political promise called “Triple Lock,” the state pension increases every year.
This means that state pensions will rise each April by the highest of inflation, income growth or 2.5 percent.
Tax trap: Likely increases in state pensions will mean more pensioners will end up having to pay income tax
The Office for National Statistics today confirmed that wages including bonuses rose by 8.5 per cent in the three months to July – the period used for the triple lockdown.
This means an 8.5 per cent increase in the state pension next April is all but certain.
This could only change if the inflation rate is higher in September.
The triple lock will weigh the September inflation figure announced at the end of October and compare it with that 8.5 per cent to determine the state pension increase for next year.
However, this figure is very unlikely to exceed 8.5 percent as inflation was 6.8 percent in July, up from 7.9 percent in June.
An 8.5 per cent increase means state pensioners would receive an extra £9 billion a year.
The new state pension for men born on or after April 6, 1951, or women born on or after April 6, 1953, is set to rise by £902.20 a year to around £11,500.
These state pensioners will receive £221.20 per week, an increase on previous levels £203.85.
Pensioners receiving the basic state pension who reached state pension age on or before April 5, 2016 will receive £169.50 per week, up from £156.20.
Brits pay income tax on income over £12,570 a year.
Steve Webb, a partner at consultancy LCP and a former pensions minister, said an 8.5 per cent rise in the state pension would “make many more pensioners pay 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 actually rises by 8.5 percent, that means 650,000 pensioners will pay additional income tax, LCP said – or around 9.15 million people.
Will the triple lock survive?
Various governments have toyed with the idea of abolishing or weakening the triple lock since its introduction in 2010.
However, everyone ultimately decided to keep it, except for 2022/23, when the triple lock became a double lock because profit growth was removed from the formula.
The government took this decision to ease pressure on the economy during the pandemic and reintroduced the triple lock for the current 2023/24 tax year.
But despite the cost pressures on the government, LCP’s Webb said the triple lock was likely to remain in place.
Tinkering with the triple barrier again would be politically damaging and would also require the introduction of new laws.
Webb added: “Once again, ‘secret’ taxation is proving to be a handy source of income for the Chancellor.”
“On the triple lock policy, with the general election approaching, it seems completely unthinkable that the government would break the triple lock promise for a 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.”
“It is much less clear what each party will do when it comes to its election manifesto.”
“There is no doubt that both the current government and the opposition would be happy to abandon this policy in order to spend the savings elsewhere.”
“But both want to avoid a situation where they moved first by abandoning the triple lock and then discover the other party has retained it.”
How much is the current state pension?
The full state pension is currently £203.85 per week or £10,600 annually.
People who retired with a full basic state pension before April 2016 will receive £156.20 a week or £8,120 a year.
The old principle is topped up by additional state pension entitlements – S2P and Serps – if acquired during working years.
People who opted out of S2P and Serps over the years to pay less National Insurance contributions and retire after April 2016 may receive less than the full new state pension.
To receive the new flat rate state pension, employees will now have to demonstrate 35 years of contributions, compared to 30 years of qualifying social security contributions to receive the old state pension.
But even if you’ve been paying the full amount for 35 years or more, your salary may be reduced if you sign a contract for a few years.
Everyone has the option to defer their state pension to get more in later years, and you can buy state pension top-ups to cover any gaps.