Rishi Sunak’s new “triple lock plus” for state pensions would spare 750,000 retirees from being taxed in the next five years, the Institute for Fiscal Studies (IFS) has said.
The think tank said in addition to leaving 6pc of pensioners completely free from paying tax, the proposal would also boost the incomes of two-thirds of retirees, or 7.5 million people.
It comes after the Prime Minister yesterday vowed that state pensions will never be taxed under the Conservatives.
Current forecasts suggest pension payments, which are currently £11,500 a year, will otherwise exceed the £12,570 threshold at which income tax is paid by 2027.
Mr Sunak wants to raise this threshold for pensioners every year, while it would remain frozen for other taxpayers until at least 2028.
This would turn the triple lock – which uprates state pensions in line with the highest between wage growth, inflation and a baseline 2.5pc – into a so-called triple lock plus.
The Institute for Fiscal Studies said half of the giveaway from the £2.4bn pledge would come from the Government unpicking its own tax policy on frozen tax thresholds.
Paul Johnson, Director of IFS, said: “The proposal to ‘triple lock’ the income tax allowance for pensioners is another example of Conservatives proposing to undo their own tax policies.
He added: “Pensioners used to have a higher tax allowance than working-age people, but since 2010 the tax allowance for pensioners has been cut by more than 10pc while that for working age people has risen by 30pc. Going forward, about half of this proposed tax cut is simply not following through with plans for tax rises penciled in for the next three years.”
Had the government uprated the personal tax allowance in line with inflation, this would have exempted 350,000 retirees from being taxed anyway.
The think tank said in its analysis that Mr Sunak’s proposal was rather like “taking £100 off someone, giving them £200, and expecting them to think they are £200 better off”.
The election promise comes against a backdrop of rapidly-rising taxation on people past retirement age over the past few decades.
Some 62pc of people aged 65 and over pay income tax today, up from half in 2010-11 and just over a third in 1990-91.
Retirees previously had far higher tax-free allowances than other people, until the Coalition Government put an end to it.
At the time pensioners enjoyed a personal allowance of at least £9,490 while for those of working age it was £6,475.
Since then allowances for those under pension age have risen by 30pc in real terms – even when accounting for recent freezes – while pensions have taken a 10pc hit.
The IFS also noted that adding another dimension to the triple lock would saddle future governments with “considerable and costly uncertainty”.
The Treasury already spends £11bn more a year on state pensions because of the triple lock than it otherwise would have, had it been uprated in line with earnings since 2010.
The cost could well be far higher than £2.4bn a year if inflation and wages prove as unpredictable in the years to come as they have in recent times.
Many economists expect both will prove more volatile in the decades to come, as ageing demographics create labour shortages and lots of investment is needed for things like net zero and higher defence spending.
Over time a higher share of retirees would also benefit from the reform and make it more costly, as younger generations are more likely to receive a full new state pension of £11,542.
Many older women in particular receive pensions well below the threshold currently.
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