New plans for State Pension 'Triple Lock Plus' to stop older people paying retirement tax

Rishi Sunak has unveiled a £2.4 billion tax break to help secure the support of more than 12 million pensioners across the country ahead of the General Election on July 4. The Prime Minister promised to increase the Personal Allowance threshold for people over 66, giving them a tax cut worth around £95 in the 2025/26 financial year, rising to £275 in 2029/30.

The ‘Triple Lock Plus’ would see the Personal Allowance, which has been frozen at £12,570 since April 2021, rise in-line with the Triple Lock policy. Under this measure, the New and Basic State Pensions increase each year by whichever is the highest of - average annual earnings growth from May to July, Consumer Price Index (CPI) inflation in the year to September or 2.5 per cent.

This ‘Triple Lock Plus’ guarantee would mean that the Personal Allowance is always higher than the maximum rate of the New State Pension, which is now worth £11,502 annually. This leaves just over £1,068 (£89 per month) in additional income before pensioners need to pay tax.

At present, some 8.1m (64%) of the total 12.7m people over State Pension age currently pay tax in retirement, largely due to additional income from workplace or private pensions on top of their State Pension. Retirement experts predict a further 900,000 people will exceed the Personal Allowance threshold of £12,570 over the current financial year, with another 2m expected before the freeze ends in 2028.

It’s important to be aware that older people whose sole income this year is the State Pension currently do not pay tax.

The ‘Triple Lock Plus’ will cost £2.4 billion a year by 2029/30 and will be funded by clamping down on tax dodgers. Mr Sunak said the ‘Triple Lock Plus’ would deliver “a tax cut worth around £100 to millions of pensioners, demonstrating our commitment to them”.

Commenting on the proposal, Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group said: “The combination of rising wages and high inflation mean that the Triple Lock has been extremely valuable over recent years. So much so that it is rapidly closing in on the tax free Personal Allowance limit which has been frozen at £12,570 since 2021.

“The impact of this has been to drag more and more pensioners into the tax system and the proposal on the table is designed to ensure that a gap is always maintained between the State Pension and Personal Allowance so that this income remains tax free. There is some precedent for different allowances for pensioners as they are currently exempt from National Insurance payments on earnings but this would be an additional advantage.

“The question likely to hang over this approach is one of intergenerational fairness as while there are a large group of pensioners struggling to get by, there are also many who are comparatively well off and it appears the policy would apply to both groups.”

Lily Megson, Policy Director at My Pension Expert, said: "It’s a clear sign that Sunak is reverting to the old tried-and-tested model of trying to woo older voters immediately before a General Election. Sadly, although the 'Triple Lock Plus' undoubtedly has merits, last-minute policies from a party bracing for defeat are not what pension planners need.

"For too long, those in or nearing retirement have been overlooked. Meaningful policy to help address the financial challenges faced by over-60s has been lacking for many years, especially during the cost of living crisis.

“Sunak's late bid to close the gap on Labour by announcing favourable tax changes for those receiving a pension will do little to offer meaningful long-term assistance to those who have struggled under the burden of high inflation, high interest rates and a high tax burden."

State Pension and tax in a nutshell

The full New State Pension is worth £221.20 each week and as payments are typically made every four weeks, this amounts to £884.80 each pay period. Over the 2024/25 financial year, this is an increase of £902, making the annual income from State Pension alone to £11,502.

This leaves just £1,068 before the personal tax threshold is exceeded, so anyone with additional income of £89 or more per month - on top of State Pension - may receive a tax bill the following year.

Someone on the full rate of the Basic State Pension will receive £169.50 each week - this amounts to £678 each pay period. Over the 2024/25 financial year, this is an increase of £692, taking the annual income to £8,814.

Frozen State Pensions

Some 450,000 older people currently do not qualify for any uplift to their annual State Pension - even though they have accrued the required amount of National Insurance contributions before taking retirement.

This is because they have retired abroad and now live in a country that does not have a reciprocal agreement with the UK Government. This means that some retirees have seen their State Pension frozen at the point of emigration.

However, the ‘End Frozen Pensions’ campaign aims to end the “injustice of pensions for Britons who have moved abroad” who do not receive the annual increase in line with the Triple Lock policy.

The campaign, run by the International Consortium of British Pensioners, advocates on behalf of Britons affected by ‘frozen pensions’ and has a number of parliamentary supporters, including Scottish Lib Dem MPs Wendy Chamberlain and Alistair Carmichael, SNP MPs Martyn Day and Ian Blackford, Alba MPs Neale Hanvey and kenny MacAskill and several Labour and Conservative MPs.

And it’s not just members of Parliament, peers from the House of Lords, high-profile celebrities and notable organisations are also supporting the End Frozen Pensions campaign - a full list can be found on its website here.