It is thought state pensions could rise by around £1,000 next year. It comes as Chancellor Rishi Sunak has pledged to restore the triple lockdown.
If the increase continues, the new state pension amount will be around £10,600. With inflation expected to stick around for many years, this may not be the last big increase either. While the hike will help claimants combat the rising cost of living, it is unlikely to improve their situation in other ways. Indeed, with the rising prices of food, fuel and energy, it is likely that they will be spent to cover these additional costs.
While the state pension will steadily increase, Sunak has frozen the personal allowance at £12,570 for five years. Each year this freeze will continue, the state pension will gradually approach the point at which pensioners begin to pay income tax. The new state pension currently pays a maximum of £9,627.20, almost £3,000 below the basic income tax threshold. As incomes rise, millions of people will either start paying taxes for the first time or find themselves pushed into a higher tax bracket.
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Under the triple lockdown, the state pension either increases with earnings or inflation, or by 2.5%, whichever is higher. Next year the inflation figure is certain to apply, with the Bank of England forecasting consumer price growth to reach 11% in October. For triple-lock purposes, the September figure applies, and this could easily exceed 10%, pushing the new state pension to around £10,600 a year in the tax year 2023/24.
For example, if inflation remains at 7% for the next three years and the government applies the triple lock each time. In 2024/25 the State Pension will increase to £11,342, then to £12,135 in 2025/26 and to £12,985 in 2026/27. This will exceed the personal allowance of £12,570, at which point income tax will kick in.
Now, 2026/27 is the year Sunak’s personal allowance freeze ends. So he could get around that by raising the base rate tax threshold above whatever the state pension pays. Or he could suspend the triple lock for the second time. Either way, the freeze will still leave millions more pensioners dangerously close to the base rate tax threshold.
Any income they earn over that amount could instantly incur a 20% basic tax. Just like income from a job. It’s part of a wider trend that will drive more pensioners into the clutches of HMRC. From April next year they will pay National Insurance for the first time, on any income from employment.
It will start at 1.25%, but as I predicted before, this rate is likely to increase over time. It is the thin end of a very long wedge. It is undoubtedly good news that the triple lock of the state pension will do its job and maintain the real value of pensioners’ incomes. Yet thanks to Sunak’s tightening of the personal allowance threshold, it will also push more retirees to pay income tax.