More Pensioners Could Pay Tax Next Year

The annual State Pension uprating, known as the Triple Lock, will continue until the end of the decade. The Triple Lock ensures that the State Pension increases based on the higher of the Consumer Price Index (CPI) inflation rate, earnings growth, or 2.5 percent. However, the upcoming April 2024 uprating might lead to more pensioners paying income tax. This article explores the potential implications and concerns raised by finance experts.

Triple Lock to Boost Payments

The Triple Lock policy implemented in 2010 by the Coalition Government has garnered attention due to its impact on State Pension payments. The key factors driving the April 2024 uprating are the CPI inflation rate and wage growth. While the CPI inflation rate for the 12 months leading up to August was 6.8 percent, from April to June 2023, employee wage growth (excluding bonuses) was 7.8 percent (8.2 percent including bonuses).

The earnings growth figure, which determines the State Pension increase, is based on the year-on-year increase from July to August. This figure will be published on September 12. If the earnings growth remains at 7.8 percent, it guarantees a 7.8 percent rise in the State Pension next April, even if inflation decreases.

However, this increase in the State Pension could have unintended consequences, with more pensioners potentially paying income tax. Financial experts at Evelyn Partners, a wealth management firm, have indicated that the latest income tax statistics estimate that 8.1 million people over State Pension age will pay income tax in the 2023/24 financial year. This represents a 25 percent increase from the 6.47 million pensioners who paid income tax in 2020/21.

Gary Smith, Partner in Financial Planning at Evelyn Partners, cautions that a “policy showdown is on the horizon” between the Triple Lock and the freeze on the personal income tax allowance. Currently, the UK Government has decided to freeze the personal allowance at £12,570 until at least 2027/28, with no alternative policy proposed by the Labour Party.

If the current high wage growth of 7.8 percent continues, the full New State Pension for the 2024/25 tax year will be £11,427. Subsequently, it will only require Triple Lock increases of 3.5 percent for the following three years to push the annual State Pension income above the frozen personal tax allowance of £12,570.

This presents a dilemma for the future UK Government: either levy taxes on the State Pension, which may prove unpopular among the estimated 13 million pensioners at that time, or increase the personal tax allowance for everyone to avoid the issue.

Currently, the full New State Pension almost consumes the entire personal tax allowance, leaving only £1,970 available after accounting for the State Pension. If the State Pension rises by 7 percent for the 2024/25 tax year, only £1,228 of the pensioner’s tax exemption will remain. Consequently, even pensioners with modest private incomes may find themselves paying the basic rate of 20 percent in income tax.

Gary Smith also emphasizes the importance of Individual Savings Accounts (ISAs) as a tax-efficient way to supplement retirement income. While contributions to ISAs are made from taxed income for most people, the income generated from ISAs during retirement is not subject to tax.

The Institute for Fiscal Studies (IFS) has previously raised concerns about the long-term sustainability of the Triple Lock policy. A government-ordered review by Baroness Neville-Rolfe suggested capping State Pension spending at 6 percent of GDP to ensure fairness across generations.

Conclusion

The upcoming April 2024 State Pension increase, based on the Triple Lock policy, could lead to more pensioners paying income tax. High wage growth may push State Pension income above the frozen personal tax allowance, resulting in tax liability for pensioners. This issue has prompted calls to reconsider the income tax on the State Pension. As the debate continues, individuals are encouraged to explore tax-efficient alternatives like ISAs to supplement retirement income.