The state pension is ‘certain’ to exceed tax thresholds by 2027, with next year’s uprating pushing it to just below the personal allowance.
Figures published by the Office of National Statistics today show that average earnings in the three months to July stood at 4.7 per cent. Unless there is a sudden spike in inflation, or this figure is revised, this is likely to be the measure used to uprate the state pension in April, under the terms of the triple lock.
According to analysis by LCP partner Steve Webb – a former pensions minister – shows that this will put the state pension on £12,534 per year, less than a pound a week short of the income tax threshold of £12,570.
Under the terms of the triple lock, which this Government has pledged to uphold, the state pension is uprated each year in line with either inflation or average earnings — depending which is higher, or 2.5 per cent if both are below this.
Webb points out that the lowest increase the following year will be 2.5 per cent, which will mean all those in receipt of the full state pension will have to pay income tax on this benefit.
Webb says the earnings figure published today could be subject to later revision, either up or down. He adds that the July’s inflation figure stands at 3.8 per cent, with August figures due to be published tomorrow.
The September figure which feeds in to the triple lock will be published in mid October. If inflation continues to rise, it is possible this will exceed the earnings growth figure, but Webb says this seems unlikely, with the Bank of England recently estimating that CPI would not exceed 4 per cent this year.
For pensioners who receive ‘additional state pension’ (also known as Serps or State Second Pension) on top of their basic pension, this additional element will be increased in line with the CPI figure for the year to September.
Webb, partner at pension consultants LCP says: “The standard rate of the new state pension is creeping ever closer to the frozen personal tax allowance. Indeed, we know for certain that someone who has no other income aside from the new state pension will be a taxpayer come April 2027.
“It is already the case that nearly three quarters of all pensioners pay income tax, and the ongoing freeze in tax thresholds coupled with steady rises in the pension will drag more and more into the tax net”.