‘Pensioners could soon be taxed on state pension income’ as Labour fails to rule out
Pensioners could soon be taxed on their state pension income, an expert has suggested.
If inflation or wage growth gives an unexpected boost to the state pension, it will shine a harsh light on the affordability of the triple lock and on the stealth tax rises effected by the long-term freeze in personal tax thresholds.
The Labour manifesto, published this morning, set out the policies that the party aim to deliver if they win in the General Election.
Sir Keir Starmer has pledged to make wealth creation the “number one priority” and to have a tough hand on spending rules.
Labour pledged to continue to state pension triple lock, but there was no mention of matching the Conservatives triple lock plus pledge. Jonathan Reynolds says the party “would inherit” spending plans set out by Jeremy Hunt, which include frozen tax thresholds.
Jason Hollands, managing director at wealth management and professional services group Evelyn Partners said: “The long-term sustainability of the state pension and the triple lock is a nettle that all parties are reluctant to grasp, and an election campaign is the least likely time of all for such political bravery.
Pensioners face being taxed on the state pension as it increases by the triple lock but the personal allowance remains frozen GETTY“Labour has, as expected, pledged to retain the triple lock but stopped short of matching the Conservatives’ rather ambitious ‘triple lock-plus’.
“This means the state pension – at its full rate of £11,502 a year – will remain on a rapid collision course with the personal allowance, the amount of income which can be earned tax-free each year.
“This is currently frozen at £12,570 until 2028, a timeline Labour has said it will stick to. This raises the prospect that pensioners will soon be taxed on their state pension income, and the OBR has forecast that the state pension will overtake the personal allowance level by 2027. But if inflation or wage growth gives an unexpected boost to the state pension, this could happen sooner.
“That would present a new Labour Government with a major policy quandary, shining a harsh light both on the affordability of the triple lock and on the stealth tax rises effected by the long-term freeze in personal tax thresholds.”
Any earnings below £12,570 are usually tax free, but once people start earning more, they could be charged up to 45 per cent in tax
- 12,570 – £50,270 will pay a rate of 20 per cent
- £50,271 and £125,140 will pay a rate of 40 per cent
- Over £125,140 will pay 45 per cent
With the personal allowance threshold frozen until 2028, the increase in state pension will drag pensioners into paying more tax.
The plans to freeze this make tax increases inevitable as wage rises push more people above the tax-free income threshold.
Economic think-tank the Resolution Foundation has said plans set out in the last budget – amount to a series of tax rises that will cost the average household an extra £800 a year by 2028-29.
The biggest increase will be from the continued freezing of all income tax thresholds – not just the personal allowance. The income tax thresholds have not risen with inflation since 2021 and will likely stay fixed until 2028.
A separate think-tank, the Institute for Fiscal Studies, has warned this would bring 4.5 million more people into higher income tax thresholds by 2028.
Since 2010, the state pension in the UK has been raised by around £3,700 with the full, new amount sitting at £11,502.40 a year. As such, retirees only need to earn £1,067 on top of their state pension to cross this threshold and pay tax on their retirement income.
However the triple lock plus would prevent the further shrinking of the gap between the state pension and the personal allowance. The introduction of the triple lock plus would see the Conservatives able to raise the tax-free allowances on pensions annually if they are elected.
It would enable pensioners to carry on getting around £1,100 a year on top of the full state pension before becoming taxpayers.
The Conservatives estimate that triple lock plus will cost £2.4 billion a year by 2029-30 and claim it can be funded out of existing policies to reduce tax avoidance.
There was also no mention of reinstating the pensions Lifetime Allowance in the Labour manifesto which will be a “great sigh of relief” among savers, public sector DB scheme members, financial advisers and the pensions industry alike that Jeremy Hunt’s abolition of the LTA will not be reversed.
Hollands added: “Labour’s threat to reinstate it had been causing a lot of uncertainty, putting some savers’ plans into paralysis, and raising the spectre of yet more stultifying legislation.”
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