Thousands of pensioners will be just £22 away from paying income tax for the first time, as the state pension is expected to rise by more than previously expected.
The state pension is likely to be increased in line with wage growth figures, under the triple lock agreement, which has been revised upwards to 4.8 per cent, according to new Office for National Statistics (ONS) data.
As this figure is likely to exceed both inflation and the 2.5 per cent floor of the triple lock formula, this means that the state pension is set to rise by 4.8 per cent next April – up from the previous estimate of 4.7 per cent.
This means those on the new state pension will receive £12,547.60 annually, an increase of £574.60, putting them just £22.40 away from hitting the personal tax allowance.
This has been frozen at £12,570 since 2021 and is currently expected to remain at that rate until 2028.
According to HMRC data, there are currently 8.72 million people over state pension age paying income tax, as they will also receive a private pension.
Analysts estimate that, with this increase, a further 400,000 pensioners – who rely solely on state pensions – could be brought into the tax system next year.
The news will increase the pressure on politicians over the expense of maintaining the triple lock when public finances are being squeezed.
The current Labour Government has avoided committing to it beyond this Parliament. And Reform UK leader Nigel Farage has already said he “won’t absolutely commit” to continuing the lock if he wins power at the next election.
Steve Webb, former pensions minister and partner at LCP, said: “We can now be pretty certain that the new state pension and the basic state pension will rise by 4.8 per cent.
“This will keep the headline rate of the state pension below the income tax threshold for one more year, but it will go above the tax threshold in 2027 if allowances do not rise.”
While the increase will be welcomed by pensioners struggling with rising living costs, it poses a political challenge for the Treasury as it grapples with what to do about more pensioners being pushed into paying tax.
There will be growing pressure on the Chancellor to make changes in the Budget, for example, unfreezing the thresholds, which would hamper the Treasury’s income, or making pensioners exempt from paying the tax.
There is an added complication in that the state pension age will begin to rise again from April, meaning fewer people will qualify for the pension next year, offsetting some of the increase in those brought into the tax net.
The state pension age is currently 66 for both men and women, but is set to rise to 67 between April 2026 and April 2028, and then to 68 between 2044 and 2046 under current legislation.
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Even so, hundreds of thousands of existing pensioners are still expected to pay income tax for the first time as a result of the latest increase.
David Brooks, head of policy at independent consultancy Broadstone, said the changes highlight the growing tension between the generosity of the triple lock and the Government’s fiscal constraints.
He said: “For the first time ever, it looks likely that the state pension will exceed the personal allowance, meaning those in receipt of the full new state pension will be taxed on that income.
“It is bad news for the Chancellor, who will have to fund the increased cost of providing this benefit to pensioners next year.
“With the state pension age review ongoing, it is a timely reminder of the accelerating cost of the triple lock and that amendments appear inevitable looking to the future.
“In the short-term, budgetary pressures remain tight and so, as we head towards winter, the news will be positive for those pensioners who rely on the state pension to provide the majority of their income.”
The triple lock, introduced in 2010, guarantees that the state pension rises each year by the highest of average earnings growth, inflation, or 2.5 per cent.
While designed to protect retirees from falling living standards, it has become increasingly expensive as inflation and wage growth have soared in recent years.
With the cost of the triple lock rising and tax thresholds frozen until 2028, more pensioners are being drawn into the tax system despite modest increases in their real income.
Some experts have suggested reform to the triple lock.
Jon Greer, head of retirement policy at Quilter, said: “A more sustainable alternative would be a smoothed earnings link that would base annual increases on a rolling average of wage growth over three years. This would reduce volatility and better align pension increases with long-term economic trends.
“Alongside this, in periods where inflation is relatively high, the state pension could increase in line with prices until real earnings recover, at which point it could then revert back to its average wage growth. Effectively, this would maintain the state pension to a benchmark proportion of average earnings.
“The triple lock has done its job. Now it is time to replace it with a system that is fairer, offers more certainty, and fit for the future.”
For most pensioners, however, the immediate impact will be welcome relief.
Many rely heavily on the state pension as their main source of income, and the 4.8 per cent rise will provide a small but tangible boost at a time when household budgets remain under pressure from energy, food and housing costs.
But the political debate around the sustainability of the triple lock – and its knock-on effects on taxation – is only set to intensify in the years ahead.
At the time of the last stats announcement last month, Work and Pensions Secretary Pat McFadden, said: “This Government is committed to maintaining the triple lock for the course of this Parliament.
“The OBR estimates that will mean a rise in the state pension of around £1,900 a year over the course of the Parliament. That’s a commitment from the Government to the United Kingdom’s pensioners to maintain the value of the state pension, and that’s something that we said we’d do at the election, and something that we will keep to.”
The Department for Work and Pensions has been contacted for comment.
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