The Conservatives and Labour recently committed to honouring the Triple Lock guarantee on State Pensions until the end of the decade. The policy was introduced by the Coalition Government in 2010 to ensure that the State Pension rises in line with the greater of the September’s Consumer Price Index (CPI) inflation rate, earnings growth, or 2.5%.
The Secretary of State for Work and Pensions, Mel Stride MP, said last month that the Triple Lock would “almost certainly” be in next year’s Conservative Party manifesto and that there was a “particular duty” to support pensioners who cannot increase their income by working. This year, the Basic and New State Pension increased by 10.1%.
The Bank of England’s latest CPI inflation rate forecast for September is 7%, which would boost the full New State Pension from £10,600 to £11,342 from April next year. However, this could result in more pensioners paying income tax.
Finance experts at wealth management firm Evelyn Partners said that the latest annual income tax statistics from HM Revenue and Customs (HMRC) estimates that there are 8.1 million people over State Pension age paying income tax in the 2023/24 financial year. This is a 25% increase on the 6.47 million pensioners who paid income tax in 2020/21.
Gary Smith, Partner in Financial Planning at Evelyn Partners, warns that a “policy showdown is on the horizon” between the Triple Lock and the personal income tax allowance freeze.
He explained: “Both Conservatives and Labour have pledged a commitment to the Triple Lock in their manifestos for the upcoming general election. And the policy of the current UK Government is to keep the personal allowance frozen until at least 2027/28 at £12,570, with no indication of an alternative policy from Labour.
“If the Bank of England’s latest forecast for September inflation of 7% is correct, then the Triple Lock - assuming wage growth does not exceed 7% - will boost the full New State Pension to £11,342 in the 2024/25 tax year.”
He added that in the subsequent three years it will require Triple Lock increases of ‘just’ 3.5% to send the annual State Pension income above the frozen personal tax allowance threshold of £12,570.
He continued: “That then presents a conundrum to the Uk Government of the time: create an administrative and political headache by taxing the State Pension, possibly at source - which would be massively unpopular among the more than 13 million people then expected to be of State Pension age - or make the headache go away by raising the personal tax allowance for everyone.”
The financial expert explained how the current full, New State Pension takes up all but £1,970 of the personal tax allowance, and if it rises by 7% for 2024/25 then just £1,228 of a pensioner’s tax exemption will be left after the State Pension is taken into account.
This means that “anyone with even a modest private income is being tipped into paying basic rate tax at 20%”.
Mr Smith said: “While pension saving can still be very tax-advantageous - particularly if a saver is a higher or additional rate taxpayer in their working life but then a basic rate payer when they draw on their pension - this does serve to remind today’s savers of the value of ISAs, which can provide a valuable supplementary income to pensions during retirement which is not taxed at access. Although contributions to ISAs for most people will be from taxed income.”
Earlier this year, the Institute for Fiscal Studies (IFS) raised concerns that the Triple Lock policy is “unsustainable” in the long term. This was followed by a government-ordered review by Baroness Neville-Rolfe which recommended that spending on State Pensions - currently 4.8% of GDP - should be capped at 6% to ensure “a greater element of fairness in expenditure across generations”.
New State Pension annual payment forecasts
The full, New State Pension is worth £10,600 during the 2023/24 financial year. Finance experts at Evelyn Partners have calculated the possible annual payments over the next four financial years.
- 7% rise in 2024/25 - £11,342
- 3.5% rise in 2025/26 - £11,739
- 3.5% rise in 2026/27 - £12,150
- 3.5% rise in 2027/28 - £12,575
State Pension and income tax
The MoneyHelper website explains that State Pension income is taxable but usually paid without any tax being deducted and reminds retirees that they no longer have to pay National Insurance contributions after reaching State Pension age.
The amount of income tax you pay depends on your total annual income from all sources.
For example:
- earnings (including State Pension)
- profits from self-employment
- rental income
- other pensions you’re getting
- bank or building society interest
- income from your investments.
The guidance states: “You only pay Income Tax once your total annual income is above your Personal Allowance.
“If your total annual income is more than your Personal Allowance, you’re liable to pay Income Tax on the amount that exceeds the Personal Allowance.”
It adds that although tax isn’t deducted from the State Pension, it will therefore use up some of your tax-free personal allowance. Full guidance on State Pension and tax can be found on the MoneyHelper website here.
Calls to scrap income tax on State Pension
An online petition calling on the UK Government to “introduce a Bill to remove income tax on the State Pension” has received more than 7,000 signatures of support - at 10,000 the UK Government will respond to the proposal.
Petition creator Ray Crawford argues that people like himself are “penalised by the UK Government and HMRC by paying income tax on our State Pension because we have either workplace or private pension schemes to support us in later life”.
The petition is hosted on the official petitions-parliament website here and is open until September 30, 2023.
To keep up to date with the latest State Pension news, join our Money Saving Scotland Facebook page here, follow us on Twitter @Record_Money, or subscribe to our newsletter which goes out Monday to Friday - sign up here.
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