The ‘unaffordable’ triple lock has backed the Treasury into a corner
Key Points
- From April 2027, state pensions will rise above the personal allowance for income tax.
- The ever-ratcheting triple lock and the frozen personal allowance mean that pensioners are set to be on the hook to pay a small amount of tax on their state pension payments.
- The government has said those whose sole income is the state pension will not need to pay this tax.
- However, this awkward predicament will grow with the triple-lock annual increases, which Andy Burnham has said he will retain for this Parliament if he takes power in Westminster.
In April 2027, the government’s policy of ratcheting up pensions and freezing tax thresholds will see it start taxing the state pension it pays out.
For years, successive Conservative and Labour governments have committed to keeping the pension ‘triple lock’, which guarantees that the state pension rises each year by whichever is highest of inflation, average earnings growth, or 2.5%.
State pension in the UK is not a pot you pay into and draw out of – it is a benefit like any other and is paid for by today’s working population, not by the pensioners who receive it.
Increasing this benefit amount according to the generous terms of the triple lock has resulted in a growing welfare state that Britain is increasingly struggling to support as its population ages.
While the average age in the world’s fastest growing countries is often in the teens or twenties, the average age of a person in Britain has risen to over 40 years old.
The triple lock has been called ‘unaffordable’ by former Prime Minister Tony Blair, who has urged the Labour government to revisit the welfare state to provide the country with the growth it needs.
Coupled with the triple-lock increases often outpacing wage growth, the government has found itself facing the difficulty of funding a growing welfare bill. Of the government’s total social security bill of £322.6 billion, 55% goes to pensioners.
Funding spending through fiscal drag
Faced with the impossible challenge of funding this spending, the government has historically used economic migration to offset Britain’s plummeting fertility rate and it has increased its tax take from workers in real terms through ‘fiscal drag’.
Fiscal drag is often labelled by critics as a ‘stealth tax’, and consists of freezing tax thresholds and tax-free personal allowance you can earn before paying income tax.
Freezing these thresholds and the personal allowance while wages and costs rise with inflation effectively allows the government to tax citizens more without announcing any changes to the rate of tax.
Every year the personal allowance is frozen and wages rise with inflation, workers pay more tax in real terms.
The UK government has frozen income tax thresholds often in recent years, is not aiming to increase the personal allowance any time soon. It has confirmed that the personal allowance in the UK will be frozen at £12,570 until 5 April 3031.
The triple lock continues to ratchet the welfare bill ever higher, however, and this has put the Treasury in an awkward position created by the impossible bargain it has made.
State pension soars above frozen personal allowance
The government has confirmed that from April 2027, the state pension will grow beyond the personal allowance.
Thanks to the terms of the triple lock, the state pension will grow by at least 2.5% (most likely significantly more) in April 2027, which will take it to at least £12,861 – more than the personal allowance of £12,570.
This means that, without intervention, those receiving the new state pension and no other income would still be required to file a self-assessment tax return with HMRC and pay tax on the amount they receive above the personal allowance.
The government has said that in principle, the state pension is taxable, but added that HMRC would not require pensioners whose sole income is the new or basic State Pension to pay small amounts of tax on the proportion of their pension that exceeds the personal allowance.
Those pensioners who receive private pensions already pay income tax on their pensions under the PAYE scheme, which deducts the tax at source.
Considering the personal allowance will remain frozen for the foreseeable future, this means that if the triple lock and the Treasury’s approach to this issue persist, the government will every year refuse to claw back an increasing amount of tax owed by those receiving only state pensions.
Andy Burnham, who is expected to soon replace Keir Starmer as Prime Minister, has already said he will not address the triple lock this Parliament and would ensure that state pensioners would not have to pay tax on the basic or new state pension if it is their only income.
