Britain’s pensioners are set to pay tax on their state retirement benefit from 2027 after official earnings data confirmed that the state pension will rise by an inflation-busting 4.7% next April.
The uprating means Britons over the age of 66 will get a £561.60 (€648.60) increase in their retirement income to £12,534.60 (€14,484.50) from April, putting them on course to pay tax from 2027 unless the government raises their tax-free personal allowance. It would be the first time in history that the state pension incurs income tax.
Under the triple lock, the state pension rises by the greatest of either earnings, inflation, or 2.5%. The earnings number is taken for the three months to July, published by the Office for National Statistics earlier Tuesday. Inflation, currently at 3.8%, is not expected to surpass the 4.7% increase in wages.
The uprating is slightly higher than the 4.6% forecast in March by the Office for Budget Responsibility and will see the cost of the benefit increase by £6.5 billion (€7.51 billion) to £144.5 billion (€166.92 billion). In 2028, the pension age will rise to 67.
Steve Webb, partner at pension consultant LCP, said the triple lock guarantees that a pensioner with no other income will pay tax in 2027 as the minimum 2.5% increase under the triple lock will lift it at least £12,850 (€14,834) . The threshold at which people must pay income tax is currently £12,570 (€14,500). The tax thresholds are currently frozen until April 2028.
UK Chancellor of the Exchequer Rachel Reeves faces a tough budget in November and will struggle to afford many giveaways but she could create an additional threshold that exempts the state pension from tax.
At the 2024 election, the Conservative Party promised a “Triple Lock Plus” under which the pensioner personal allowance would rise at the same rate as the state pension. The party costed the policy at £2.4 billion (€2.77 billion) in 2029-30, using Treasury estimates.
“The standard rate of the new state pension is creeping ever closer to the frozen personal tax allowance,” Webb said. “Indeed, we know for certain that someone who has no other income aside from the new state pension will be a taxpayer come April 2027.”
“It is already the case that nearly three quarters of all pensioners pay income tax, and the ongoing freeze in tax thresholds coupled with steady rises in the pension will drag more and more into the tax net.”
The OBR said in a recent report the triple lock, which was introduced in 2011 and has been guaranteed by the Labour government, has become increasingly unaffordable and by 2030 will cost three times more than expected in 2030 than when it was introduced.