Prime Minister Andy Burnham’s decision to effectively axe the state pension triple lock during the next Parliament could create a “two-tier tax system”.
Yesterday, the PM delivered an impassioned address at the Labour conference, pledging that pensioners on low incomes will be shielded from income tax throughout this Parliament.
The commitment comes as a projected 3.9 per cent triple-lock increase is set to push the new full state pension to roughly £13,036.
This is comfortably above the £12,570 personal allowance, the threshold at which someone begins paying income tax , which remains frozen until 2031.
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That collision between a rising state pension and a static tax threshold threatens to pull millions of pensioners into the income tax net for the first time.
Mr Burnham also confirmed that Labour will maintain the triple lock guarantee through to 2030 despite calls to scrap the mechanism sooner.
Paul Robbins, the director of Tax at Croner, has raised questions about the practical delivery of Mr Burnham’s promise.
He said: “It’s likely there will be a ‘special pensioner exemption’ to ensure those pensioners wholly dependent on the state pension as their only income source, will not suffer an unfair tax burden,”
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Mr Robbins added: “This approach could result in a rather messy two-tier tax system. It remains to be seen how this will work in practice.”
The triple lock has been in place since 2011, guaranteeing that the flat-rate components of the State Pension rise annually by whichever is greatest among average earnings growth, CPI inflation, or 2.5 per cent.
Under the updated formula, the annual increase is set at the highest of CPI inflation, 2.5 per cent., or whatever uplift is necessary to ensure the state pension keeps pace with cumulative average earnings growth.
With the personal allowance locked at £12,570 until April 2031, fiscal drag will continue sweeping more taxpayers into higher bands as incomes climb.
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The Government faces mounting calls to raise the personal allowance to £15,570, a move that would ease the burden on lower earners across the board.
However, Mr Robbins such relief “will undoubtedly require funding by tax hikes elsewhere, potentially in the corporation tax rates”.
He added: “As we await the highly anticipated Autumn Budget, anything could happen but, for now at least, it appears that pensioners’ state pension income is safe.”