Around 2.5 million people could still pay tax on their state pension if the Conservatives’ proposed “triple lock plus” policy is put in place, a former Liberal Democrat pensions minister has said.
The Conservatives unveiled plans to boost pensioners’ incomes with a new ‘triple lock plus’ pledge in an attempt to rally support from older voters ahead of the General Election.
The new policy would raise the tax-free pension allowance every year in line with the triple lock.
Under the triple lock, the state pension increases each year in line with average wages, inflation, or 2.5 per cent – whichever is highest.
Currently, the full new state pension is £11,502 a year and is below the standard personal allowance of £12,750 per year.
The personal allowance was frozen in 2021 and is not set to rise again until 2028, however, before this, it would rise yearly with inflation.
It said that around 2.5 million people across Britain have state pensions above the income tax threshold
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The OBR (Office for Budget Responsibility) has forecast that the state pension is expected to be higher than the frozen personal allowance level by 2027.
The Conservatives say this would leave millions more pensioners paying income tax, which would be 20 per cent on everything they earn over the allowance.
But under the new scheme, the state pension will always be below the tax-free threshold, meaning pensioners would not get taxed.
However, research from consultants LCP (Lane Clark & Peacock) indicated significant differences in the amount of state pension that people receive.
LCP said that while a triple lock plus policy would deliver a lower tax bill for millions of pensioners than a policy of continuing to freeze personal allowances for pensioners, for around one in five pensioners it would not ensure that their state pension is completely free of income tax.
LCP analysis of Department for Work and Pensions figures on state pension receipt indicated that a significant number of pensioners have a sufficiently big state pension, mostly built up under the old system, that they are over the existing income tax personal allowance purely due to their state pension.
It said that around 2.5 million people across Britain have state pensions above the income tax threshold.
This is made up of just over two million older pensioners on the old state pension system – plus around a third of a million pensioners on the new state pension who are receiving pensions above the income tax allowance.
Sir Steve Webb, a former Lib Dem pensions minister who is now a partner at LCP, said: “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.”
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The LCP analysis found that there are currently two separate state pension systems in operation in the UK, and most pensioners are not on the new system. In 2023/24 there were 8.4 million pensioners who reached state pension age before April 6, 2016, who came under the ‘old’ state pension system, and 3.2 million who reached pension age after this date who come under the ‘new’ state pension.
The old state pension system was complex, with some people also receiving additional state pension money and the new state pension system is designed around a standard rate.
But even under this system, some pensioners may receive more than the standard amount, due to transitional measures ensuring that people who had built up pensions under the old rules could retain their entitlements.
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 2.5 per cent – just like the state pension.”
The spokesman added that “millions of pensioners will pay more tax under Labour’s retirement tax”.
