- Wage growth data likely to result in a chunky boost to the state pension next year
- But with the personal allowance frozen many more pensioners will be exposed to income tax
Hundreds of thousands of pensioners will pay income tax for the first time next tax year after a huge boost to the state pension.
Average wages including bonuses for the three months to July 2023 grew by 8.5 per cent year on year, according to figures released today by the Office for National Statistics. With inflation on a cooling trajectory, the wage figure will likely determine how much the state pension increases in April 2024.
The so-called ‘triple lock’ mandates that the state pension raises every year in line with whichever is the highest between average annual earnings growth from May to July, CPI inflation in the year to September or 2.5 per cent.
An 8.5 per cent increase would boost the full state pension from the current £10,600.20 a year to £11,501.22 in April. While broadly good news for pensioners contending with the cost of living crisis, many will end up breaching the personal allowance for the first time and start paying income tax.
The personal allowance, the level under which no income tax is due, has been frozen at £12,570 since 2021-22 and is due to remain so until 2028. Millions of people have been paying more tax as their earnings grow over the years as a result of this ‘fiscal drag’. Pensioners are no exception, with Standard Life calculating that the full state pension went from accounting for 70 per cent of the personal allowance in 2019-2020 to an expected 92 per cent in 2024-25.
Former pensions minister Steve Webb, now a partner at Lane Clark & Peacock, estimated that “well over” half a million pensioners will pay income tax for the first time next year. This is because even a small private pension income on top of the state pension will take pensioners above the personal allowance.
Jason Hollands, managing director at Evelyn Partners, noted that in the following three years, triple lock increases of just over 3 per cent would take the state pension above the personal allowance. This would create a “conundrum” for future governments, who would have to choose between taxing the state pension, possibly at source, or raising the personal tax allowance for everyone.
Prime Minister Rishi Sunak recently confirmed the pensions triple lock remained government policy, although he refused to commit to keeping it in the next Conservative manifesto.
The triple lock was suspended in the 2022-23 tax year, with the earnings part of the lock temporarily removed as wages jumped after the Covid-19 pandemic. It was later reinstated and in 2023-24 the state pension increased by 10.1 per cent in line with September 2022’s inflation rate, the highest increase ever.
