Millions of retirees will still pay tax on their state pension under the Conservatives’ “triple lock plus” policy, new research suggests.
Launching the policy as a tax cut last month, the Tories promised to keep increasing the personal allowance so people would “never pay tax on their state pension”.
However, analysis from consultancy firm Lane Clark & Peacock (LCP) shows that around 2.5 million pensioners already receive a state pension that is above the tax-free allowance.
It means that more than one in five state pensioners will continue to be taxed on the benefit even under the Tories’ plan, with older claimants and men more likely to be affected.
When launching the triple lock plus last month, the Tories promised to boost the tax-free personal allowance, currently £12,570, by the same amount as the state pension.
It would mean the triple lock was applied to the personal allowance every year for anyone of state pension age, increasing it by the highest of wages, inflation or 2.5pc – which the party said would protect the state pension from tax.
In figures that later turned out to be overstated, it also said this would provide a £100 tax cut to 8 million pensioners next year, rising to £275 by the end of the next Parliament. Labour has not matched the pledge.
The Office for Budget Responsibility estimates the next triple lock rise will be 3.7pc, which would make the state pension £11,928 for 2025-26. Under the Conservatives’ policy, the personal allowance would also rise to £13,040.
However, using the latest figures from the Department for Work and Pensions (DWP), LCP said that 2.13 million people on the old state pension were receiving £225 a week or more in 2022-23. A further 330,000 on the new state pension were drawing the same amount, of whom more than three quarters are men.
With this year’s triple lock of 8.5pc applied, they will now be receiving at least £244 a week, or £12,694 year. As this is in excess of the personal allowance, they already pay income tax on it.
LCP said that although their personal allowance would increase by 3.7pc to £13,040 under the triple lock plus, their state pension would also increase by the same amount – leaving them still paying tax despite the Tory pledge to shield them.
Sir Steve Webb, a former Lib Dem MP and pensions minister in the coalition government, now at LCP, 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 2.5 million 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.”
Former pensions minister Baroness Altmann previously said taxing the state pension would “undermine the principles of our welfare state”.
She said: “It just shouldn’t be taxable, or you’re just giving with one hand and taking with the other.”
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 2.5pc – 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.”
The maximum basic state pension is £169.50, however claimants can qualify for additional state pension through certain National Insurance contribution tests. The maximum new state pension is £221.20.
Under both systems, it’s possible to inherit some from a deceased partner, while some people also defer their pension in order to receive a higher payment when they do claim.
Around 12.6 million people claim the state pension, but the DWP figures used by LCP relate to the 11.6 million within Great Britain.
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