The effect of a pension increase on personal income tax and public finances

Andrew Park, Partner and Tax Investigation Specialist from Price Bailey, shares insight on the effect of a pension increase on personal income tax and the impact the move could have on public finances.

In June, the Labour Party announced plans to review the pensions landscape. In Labour’s Manifesto, the party detailed ambitions to improve pension outcomes, a commitment to retain the triple lock for the state pension and the promise of reforms to workplace pensions, to deliver better outcomes for UK savers and pensioners.

In their commitment to the triple lock, figures from the treasury now suggest that the Government is expected to raise the state pension by £460 from April. This comes amid the controversial move to end winter fuel payments for all but the poorest pensioners, with millions of elderly people now set to lose their access.

Andrew Park, Partner and Tax Investigation Specialist from Price comments:

“The triple lock guarantees that the state pension is getting bigger and bigger in real terms every year, but this comes alongside frozen tax thresholds. The suspected raise to the state pension will bring the full pension perilously close to the £12,570 threshold at which people start paying Income Tax on any earnings above that. It will also pull countless more pensioners with a state pension and just a small level of personal pension or savings income into paying Income Tax. Pensioners must prepare for that.”

Park continues: “It could be suggested that a fairer and more transparent approach, would be to revert to linking the state pension just to inflation and unfreezing personal allowances, increasing them in line with inflation too. However, the new government looks determined to keep thresholds frozen until 2028 and with the triple lock increasing fiscal pressure on government finances – I expect the rise will make the Government more rather than less disinclined to raise the tax threshold.”

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