A £1,275 state pension Triple Lock warning has been issued following Labour’s win at the General Election.
Following the election, we now know more about exactly how things will play out for state pensioners in the coming years, with Labour’s state pension and tax policies the focus as we know the party, led by Prime Minister Sir Keir Starmer, is fully in charge with a large majority.
It does mean, however, that the Conservatives’ Triple Lock Plus pledge, which could have handed even more money to state pensioners through tax breaks, will not come to fruition and depending on how state pension and tax policy is handled in the coming years, could push state pensioners into paying tax on their state pension even if they have no other income.
Currently, the personal allowance for income tax stands at £12,570 a year and this has remained frozen for several years.
This means that you can earn up to £12,570 per year ‘tax free’ before you start to become liable to pay 20 percent of your earnings on every £1 over that amount to HMRC.
But because of the ‘triple lock’ on the state pension, pensioners will soon find that they are hitting that tax threshold and begin to owe tax on their state pension income.
In an election sweetener, Rishi Sunak had promised to alter the personal allowance tax bands – but only for pensioners.
It meant an immediate £1,000 boost for pensioners this tax year – with another £275 on top by the end of the decade in tax breaks, according to calculations.
The ‘triple lock’ means that state pensions must rise by either the same as average earnings or in line with inflation, or by 2.5 percent fixed, whichever of those three is highest.
Because of that, some state pensioners could find themselves paying tax on their income within a few years if the state pension – currently £11,502 per year – rises above the £12,570 threshold.
Andy Wood, a tax expert at Crypto Tax Degens, said the change to the personal allowance threshold could be worth as much as £275 by the end of the decade if put in place, on top of the £1,000 that the regular Triple Lock is expected to be worth for those on the state pension.
Labour has not pledged to change Personal Allowance thresholds for anyone, or to enact the Triple Lock Plus, which means by 2028 state pensioners could pay tax on their state pension income alone.
Technically, state pensioners already pay tax on their income, but someone whose only income was the state pension would not hit the Personal Allowance threshold. In the coming years with a few Triple Lock boosts, that could change.
However, there is nothing to stop Labour changing the thresholds or the state pension workings later to avoid a tax on it, it just hasn’t made any such pledge to do so yet.