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Two million retirees to pay tax on pensions despite Tory ‘triple lock plus’ policy

Two million retirees to pay tax on pensions despite Tory ‘triple lock plus’ policy
Paloma Kubiak
Written By:
Paloma Kubiak

One in five pensioners will still be hit with tax on their state pensions, despite the Conservatives' ‘triple lock plus’ manifesto pledge to combat this issue in the future.

The Conservatives’ ‘triple lock plus’ policy “will not deliver the stated objective”, according to analysis by pension consultancy Lane, Clark and Peacock (LCP).

It said that, rather, an estimated two-and-a-half million pensioners would still be paying tax on their state pension even if the policy were implemented.

Last month, Prime Minister Rishi Sunak pledged to raise the tax-free personal allowance for pensioners as part of the ‘triple lock plus’ plan so it would rise in line with either average earnings, inflation or by 2.5% – whichever is higher – in April 2025.

This would ensure the pensioner tax allowance is always above the standard new state pension rate, so retirees would never pay tax on their state pension despite it rising year-on-year.

Tax on pensions to persist

Currently, the standard new state pension pays around £11,500 per year, which is below the current tax-free personal allowance of £12,570. But with the pension triple lock mechanism, which uplifts the income on an annual basis, within a few years, the new state pension could be above the tax threshold. As such, it could draw in retirees having to pay tax on their state pension, which for many would be their only source of income.

LCP said that two-and-a-half million people (one in five retirees) would still end up paying tax on their state pension.

This is mainly because most pensioners are not on the standard rate of the new state pension (3.2 million) but are on the old, basic state pension system (8.4 million), where amounts can vary from a few pounds per week to several hundred pounds per week.

Indeed, over two million pensioners are in receipt of the old, basic pension, which is already in excess of the tax allowance, so they would continue to pay tax even if allowances and pensions rose by the same percentage, LCP claimed.

It explained that the old state pension system was “highly complex”, combining National Insurance contribution (NIC) tests with variable additional state pension, often called SERPS.

Meanwhile, the new state pension system for those who retired from 6 April 2016 onwards is designed around a standard rate, but a significant minority of new state pensioners may receive more than the standard figure because of transitional protection of accrued rights built up prior to 2016.

LCP explained: “In simple terms, those who had built up a pension under the old rules bigger than the new flat rate as at 2016 were allowed to retain this higher entitlement even when the new rules were introduced.”

It also revealed that a third of a million pensioners (overwhelmingly men) on the new state pension are receiving pensions above the income tax allowance.

While the ‘triple lock plus’ policy will deliver a lower tax bill for millions of pensioners than a policy of continuing to freeze personal allowances for pensioners, for one in five pensioners, “it won’t deliver the stated objective”.

Pensioner taxpayers

Steve Webb, partner at LCP, said: “With record numbers of pensioners now paying income tax, there is an understandable focus on pensions and tax. But much of the discussion has assumed that pensioners typically receive a standard rate of pension such as the new flat rate of around £11,500 per year.

“The reality is that the amounts [that] pensioners receive vary hugely, from a few pounds a week to hundreds of pounds a week. We estimate that around 2.5 million pensioners, or more than one in five of all pensioners, have state pensions in excess of the income tax threshold. These pensioners would overwhelmingly continue to be taxpayers even if future policy linked the income tax allowance to increases in the headline rate of state pension”.

Related: Everything you need to know about the pension triple lock