Over half a million more pensioners could pay income tax after 8.5% state pension rise, experts warn

Around 650,000 more pensioners could become income taxpayers if the state pension rises by 8.5% in April 2024, according to estimates from consultancy firm Lane, Clark and Peacock (LCP) reported on 22 September 2023¹.

The triple lock is a promise to raise the state pension by whichever is highest of September's inflation rate, earnings growth between May and July, or 2.5%¹. An 8.5% rise looks likely in April, driven by earnings growth, though the government usually confirms the final figure in November and there is speculation it may use a lower earnings figure of 7.8% that excludes bonuses¹.

On an 8.5% rise, the full new single-tier state pension would be worth £11,502.40 a year, up £902, or £221.20 a week¹. The personal allowance is due to stay at £12,570 until 2028¹. In 2023-24 the full new state pension takes up all but £1,970 of that allowance; an 8.5% rise would leave just £1,068, so even a modest private income would bring someone into the basic rate of tax at 20%¹.

LCP said HMRC figures suggest the number of people aged 65 and over paying income tax rose by 7.73 million to 8.5 million between 2022-23 and 2023-24, after a 10.1% state pension increase¹. A further 8.5% rise would take that to 9.15 million, an increase of around 650,000¹.

The state pension is paid gross, without tax deducted¹. Where someone has a private pension, their provider normally deducts tax owed on both the private pension and the state pension, and HMRC asks one provider to collect the state pension tax if there are several¹. If the state pension is the only income, the individual is responsible for paying any tax due through self-assessment, unless the pension started on or after 6 April 2016, in which case HMRC writes with the amount owed¹. Those still working have tax taken from earnings and the state pension under PAYE, and the self-employed declare total income on a self-assessment return¹.

If the personal allowance stays frozen and the state pension rises by more than 3% a year, it would overtake the allowance, according to projections in the report¹:

Why it matters for households

The threshold at which income tax starts is frozen while the state pension is rising, so the gap between the two narrows. For a pensioner whose only income is the state pension, an 8.5% rise would still leave the payment below the £12,570 allowance, but the margin falls from £1,970 to £1,068¹. Anyone with a small private pension, part-time earnings or other income above that margin would face basic rate tax at 20% on the excess¹. The change would take effect from April 2024, subject to the government confirming the uprating in November¹. How the tax is collected depends on the mix of income: through a private pension provider, through PAYE for those still working, or through self-assessment where the state pension is the only income¹.

What happens next

The government usually confirms the final state pension amount in November¹. The personal allowance and income tax and National Insurance thresholds were confirmed in the 2022 autumn statement as frozen until April 2028¹.