Retirees could soon be taxed on their state pension income, an expert suggests.
If inflation or pay rises give the state pension a sudden boost, it will cast a harsh light on the affordability of the triple lock and on the rise in hidden taxes caused by the long-term freeze on personal tax thresholds.
Labour’s manifesto, published this morning, sets out the policies the party aims to implement if they win the General Election.
Sir Keir Starmer has vowed to make wealth creation his “number one priority” and get a tough hand on spending rules.
Labor pledged to continue receiving the triple pension, but there was no mention of matching the Tories’ triple pledge. Jonathan Reynolds says the party would “inherit” the 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. by all for such political bravery.
Pensioners face State Pension tax hike as triple-jail increases but personal allowance remains frozen GETTY“Labour has, as expected, pledged to keep the triple lock, but failed to match the Tories’ rather ambitious ‘triple lock’.
“This means the State Pension – at its full rate of £11,502 a year – will remain on a fast collision course with the personal allowance, the amount of income that can be earned tax-free each year.
“This is currently frozen at £12,570 until 2028, a timeframe the Labor 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 predicted that the the state pension will overtake the compensation level by 2027. But if inflation or pay rises give the state pension a sudden boost, this could happen sooner.
“This would present a new Labor government with a major political dilemma, casting a harsh light on both the affordability of the triple lock and the rise in hidden taxes caused by the long-term freeze on personal tax thresholds.”
Any earnings below £12,570 are usually tax-free, but once people start earning more they can 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
- Above £125,140 they will pay 45 per cent
With the Personal Allowance threshold frozen until 2028, the rise in the State Pension will entice pensioners to pay more tax.
Plans to freeze this make tax rises inevitable as rising wages push more people over the tax-free income threshold.
Economic think tank the Resolution Foundation has said the plans set out in the latest 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 come from the continued freezing of all income tax thresholds – not just personal allowances. Income tax thresholds have not risen with inflation since 2021 and are likely to remain fixed until 2028.
A separate think-tank, the Institute for Fiscal Studies, has warned that this would bring 4.5 million more people into higher income tax brackets by 2028.
Since the year In 2010, the UK state pension has increased by around £3,700 with the new full amount being £11,502.40 a year. As such, pensioners only need to earn £1,067 on top of their state pension to pass this threshold and pay tax on their pension income.
However, the triple plus lock would prevent the gap between the state pension and personal allowance from narrowing further. The introduction of the triple plus lock would see the Tories able to increase tax-free allowances for pensions every year if elected.
This would allow pensioners to continue to receive around £1,100 a year on top of their full state pension before becoming a taxpayer.
The Tories estimate the triple-plus lock will cost £2.4bn a year by 2029-30 and claim it could be funded by existing policies to reduce tax avoidance.
There was also no mention of restoring Lifetime pensions in the Labor manifesto, which will come as a “huge sigh of relief” among savers, public sector DB scheme members, financial advisers and the pensions industry as similar that Jeremy Hunt’s abolition of the LTA will not be reversed.
Hollands added: “Labour’s threat to bring it back had caused a lot of uncertainty, paralyzing the plans of some savers and raising the specter of even more muddled legislation.”
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