State pensioners face higher tax bills after the earnings link is removed from the state pension triple lock by Prime Minister Andy Burnham, financial experts have warned.
Mr Burnham has announced plans to end the Triple Lock from 2030, weeks before Chancellor John Healey unveils the next Budget on October 28. Instead of using three metrics to uprate state pension payments each April - inflation, wages or a flat 2.5% - the triple lock will only be increased automatically by inflation or 2.5%, removing the wage growth element.
Wages will instead be indexed against pension payments periodically if they fall significantly behind, the Prime Minister announced at the Labour Party Conference last week.
Frozen allowance raises tax risk
With the full new State Pension already close to the frozen tax-free Personal Allowance, which is set to stay locked at £12,570 until 2031 unless John Healey announces a change of heart, further increases could bring more pensioners with additional sources of income into the income tax net, says Derence Lee, Chief Finance Officer at Shepherds Friendly.
He told the Express: “With the personal allowance frozen at £12,570 until 2031, each rise in the State Pension increases the likelihood that more pensioners will be drawn into paying income tax for the first time. Even relatively small amounts of additional income, such as a private pension or part-time earnings, could then push them over the threshold.
“In effect, some pensioners may find that part of the future State Pension increases are offset through taxation. While the triple lock remains important in protecting against rising prices, the freeze in tax thresholds means fiscal drag is likely to affect a growing number of retirees in the coming years.
“For those approaching retirement, it’s increasingly important to look at how different income sources, including workplace pensions, ISAs and savings, work together to provide a sustainable and tax-efficient income.”
Promised exemptions and Budget plans
Andy Burnham and his Chancellor have already promised to keep former Chancellor Rachel Reeves’ policy of tax exemptions for state pensioners who have ‘no other income’ aside from the DWP state pension.
Since coming to power, Mr Burnham has announced a series of measures to help people and businesses with the cost of living, including cutting VAT from energy bills and slashing business rates for pubs and clubs.
Chancellor John Healey is expected to lay out how the Government will pay for these measures in the Budget on October 28.
