State pensioners now know how big their pay rise is likely to be next year.
The new state pension will climb above the personal allownace in 2027 (Image: Getty)
This morning, the Office for National Statistics said total pay, including bonuses, rose by 3.9% in the three months to July. That’s important because it’s one of the three figures the triple lock uses to set the annual state pension increase. The other two are September’s inflation rate and the 2.5% backstop. Right now, it looks like today’s wages figure is the likely basis for next April’s increase, unless inflation comes in higher.
Sadly, that 3.9% increase is lower than market forecasts of 4.1%, which I reported on Sunday. That’s bad news and I’m sorry to deliver it. The original forecast turned out to be too upbeat as private sector pay growth disappoints. So instead of rising by almost £515 a year, the full new state pension seems likely to increase by £488.80 a year from today’s £12,547.60. That will lift it above £13,000 for the first time ever – to £13,036.96 to be precise.
In weekly terms, the full new state pension will rise from £241.30 to around £250.70 a week from April 2027, an increase of £9.40. How much people will get in practice will depend on their National Insurance contributions. Older retirees on the basic state pension will get a weekly increase from £184.90 to around £192.10 a week. That’s an extra £7.20, or £374.40 a year. Annually, the full basic state pension will rise from today’s £9,614.80 to £9,989.20. That’s more than £3,000 lower than the new state pension, for reasons I explained yesterday.
Remember, the earnings figure doesn’t necessarily have the final say. September inflation still counts. Inflation was 2.9% in July, but it’s expected to climb. We’ll get the September figure in mid-October. Oil has surged to around $108 a barrel, which may push inflation higher, so pensioners could get more. We’ll see.
Then comes the worrying bit. With the full new state pension hitting almost £13,037, it will climb above the frozen £12,570 personal allowance for the first time ever. That’s £467 over, to be precise. It means a basic rate 20% taxpayer could pay £93.40 of their state pension to HMRC.
It also means that even more pensioners will be dragged into the tax system as the state pension rises while the tax-free allowance stays stuck in the same place.
HMRC estimates that 9.5 million people of state pension age currently pay income tax, up from 8.3 million just two years ago. The OBR estimates that 600,000 additional pensioners have been pulled into tax purely because of the frozen thresholds. That will rise to one million by 2030/31, when the freeze ends.
The state pension has always been taxable in law, but until now the full new state pension has stayed below the personal allowance. That changes in April. For the first time, someone receiving the full new state pension will have income above the tax-free threshold from the state pension alone.
Former chancellor Rachel Reeves came up with a sticking plaster. She promised that pensioners whose only income is solely from the state pension, won’t have to pay the tax that would otherwise be due. But the Government still hasn’t explained exactly how this will work.
Basic state pension increments such as Serps and S2P have always been taxable, and that won’t change. So only around 800,000 out of 13 million pensioners will benefit from Reeves’s pledge. Which also creates a terrible cliff edge.
If a pensioner has even a small amount of other income, whether a private pension, additional state pension, savings or other taxable income, they won’t benefit from Reeves’s promise.
But we don’t know for sure, said Rachel Vahey, head of public policy at AJ Bell, as we don’t yet know what HMRC will count as income. Vahey also warned: “Collecting the little bits of tax owed from millions of pensioners is going to be an administrative headache.”
This is only the start of the pensioner nightmare. The personal allowance is frozen at £12,570 until 2031. The state pension will keep rising under the triple lock. So pensioners will keep getting bigger pensions while the amount they can receive tax-free stays exactly where it is.
The triple lock may have delivered another decent pay rise, but for millions of pensioners it comes with an unpleasant tax sting in the tail. It will get worse every year.