Older Britons will receive a £550 boost to their income next year with an inflation-busting rise in the state pension, the Treasury has confirmed.
Rachel Reeves will announce the new rate of pension payments at the Budget on Wednesday, using the “triple lock” policy to determine the level of increase.
Under the triple lock, the state pension increases each year by the same rate as inflation, average earnings growth or 2.5 per cent – whichever is highest.
Wages grew at 4.7 per cent in the year to July, higher than inflation which is currently at 3.6 per cent, meaning that the full new state pension will be worth just over £240 a week in 2026-27. That amounts to a £550-a-year increase, £120 more than if it had been raised in line with inflation.
From 2027, it is almost certain that pensioners will have to pay income tax even if the state pension is their only form of income, because the nominal value of the payment is increasing each year while the threshold for paying tax is frozen.
The Chancellor said: “Whether it’s our commitment to the triple lock or to rebuilding our NHS to cut waiting lists, we’re supporting pensioners to give them the security in retirement they deserve.
“At the Budget this week I will set out how we will take the fair choices to deliver on the country’s priorities to cut NHS waiting lists, cut national debt and cut the cost of living.”
The triple lock is currently supported by all political parties, although many economists have warned that it will prove increasingly unaffordable over time because it means that pensions inevitably grow faster than wages or prices.
Income tax freeze consequences
Ahead of the Budget, the Liberal Democrats warned that the freeze on tax thresholds is on course to drag nine million people into paying a more punitive rate of income tax.
The thresholds used to increase in line with inflation, so that people did not face a higher tax rate if their earning power was not growing, but they have been frozen since 2021 and Reeves is expected to extend the freeze again until 2030.
Data from the House of Commons show that this policy will mean 4.8 million people paying income tax who would otherwise be exempt. Another 4.2 million will be dragged into the 40p higher rate band rather than paying the 20p additional rate.
The Lib Dem deputy leader, Daisy Cooper, said: “Rachel Reeves once accused the Conservatives of ‘picking the pockets’ of working people by freezing tax thresholds – now Labour plans to do exactly the same. That’s rank hypocrisy.”
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She will tell the CBI business group: “If a university undergrad chooses to get a Christmas job and works 40 hours a week in the three weeks before December, they then have the right to those same hours in January, February and March.
“Great. Except there’s no demand then, and revenue falls off a cliff. A measure designed to ensure employment in January will effectively mean firms don’t hire in December – and everyone loses.”