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Nearly 2.5mn pensioners will still pay tax on their state pension after the implementation of the proposed “triple lock plus” policy, research from LCP has revealed.
At its launch earlier this month, the Conservative manifesto pledged to ensure the personal allowance for income tax would rise in line with increases in the main rate of the new state pension in a policy it dubbed “triple lock plus”.
As the standard rate of the new state pension is currently below the standard personal allowance, this policy would ensure that pensioners whose taxable income consisted exclusively of a new state pension would have no income tax liability.
However, LCP’s research showed there is “huge diversity” in the amount of state pension which people receive.
Additionally, the research warned that an excessive focus on the single figure of the standard new state pension may miss a “significant” group of pensioners who receive much more than the standard amounts.
LCP partner, Steve Webb, said: “With record numbers of pensioners now paying income tax, there is an understandable focus on pensions and tax.
“But much of the discussion has assumed that pensioners typically receive a standard rate of pension such as the new flat rate of around £11,500 per year.
“The reality is that the amounts which pensioners receive vary hugely, from a few pounds a week to hundreds of pounds a week.
“We estimate that around 2.5mn pensioners, or more than one in five of all pensioners, have state pensions in excess of the income tax threshold.
“These pensioners would overwhelmingly continue to be taxpayers even if future policy linked the income tax allowance to increases in the headline rate of state pension.”
LCP explained there are currently two separate state pension systems in use in the UK, and most pensioners are not on the new system.
We estimate that around 2.5mn pensioners have state pensions in excess of the income tax threshold
In 2023/24, there were 8.4mn pensioners who reached the state pension age before April 6 2016 who come under the “old” state pension system, and 3.2mn who reached pension age after this date who come under the “new” state pension.
LCP analysis of Department for Work and Pensions’s figures on state pension receipt suggests that a “significant” number of pensioners have a sufficiently large state pension, mostly built up under the old system.
It cautioned these pensioners are over the existing income tax personal allowance purely on the basis of their state pension; these people would, for the most part, still be taxpayers even if a “triple lock plus” policy was introduced.
The research explained that around 2.5mn pensioners have state pensions above the income tax threshold and, of these, 2.1mn are older pensioners on the “old” state pension system.
In addition, around a third of a million pensioners on the new state pension are receiving pensions above the income tax allowance, the overwhelming majority of whom are men.
In response to the research, a Conservative Party spokesman said: “Under the Triple Lock Plus, the tax-free allowance for pensioners will rise in line with the fastest of prices, earnings or 2.5 per cent - just like the state pension.
“Because Labour opposes it, it means that a pensioner whose sole income comes from the new state pension will be dragged into paying income tax for the first time in our country’s history.
“Millions of pensioners will pay more tax under Labour’s retirement tax – with the average pensioner paying around £1,000 more in tax in the next Parliament under Labour than under the Conservatives.”
tom.dunstan@ft.com
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