Around 2.5m people ‘could still pay tax on state pension under triple lock plus’

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 triple lock is a mechanism used to increase state pensions every year, to help the living standards of pensioners keep up with those of the working population.

The Conservative manifesto contains a commitment to a triple lock plus – a proposal to ensure the personal allowance for income tax would rise in future in line with increases in the main rate of the new state pension.

The standard rate of the new state pension (around £11,500 per year) is currently below the standard personal allowance (£12,750 per year).

However, research from consultants LCP (Lane Clark & Peacock) indicated significant differences in the amount of state pension that people receive.

It said that a focus on the standard new state pension may miss a significant group of pensioners who receive significantly more than the standard amounts.

People reaching state pension age from April 6 2016 are on the new state pension – but the majority of current pensioners reached their state pension age under the old state pension system.

In 2023/24 there were 8.4 million pensioners who reached state pension age before April 6 2016 and 3.2 million who reached it after this date, LCP said.

The old state pension system was complex, with some people also receiving additional state pension money.

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.

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.

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.

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.”

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% – just like the state pension.”

The spokesman added that “millions of pensioners will pay more tax under Labour’s retirement tax”.