Pensioners enjoyed an 8.5% increase to their state pension payments from April, taking the full new state pension to just over £11,500 a year. And they are likely to enjoy another above-average increase next April too, thanks to triple lock rules.
Each year, the state pension is uprated in line with inflation, wage growth or 2.5% – whichever measure is highest. To calculate this, the government looks at the inflation figure from September and the wage growth figure from May-July.
Inflation has now fallen back to target, but wage growth remains higher, coming in at 5.7% for March to May.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
“This makes it highly likely that wage growth will be used to uprate the state pension from April next year,” explains Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
We don’t yet have the May-July wage growth figure – that won’t be published until September. However, if it stays at the current level, recipients of the full new state pension could see their annual income rise by around £600.
This will come as welcome news to retirees, particularly given that many have struggled with higher retirement costs in recent years. However, the bad news is that higher pension payments will mean a higher tax burden for many.
How much state pension will I get next year?
We’ll have to wait a little longer for confirmed figures, but if wage growth was to remain at 5.7%, recipients of the full new state pension could expect to see their weekly payments increase from £221.20 per week to £233.81.
This would take the annual figure from around £11,500 to over £12,100.
This would remain just under the personal allowance (currently frozen at £12,570), meaning most retirees would not have to pay any income tax on their state pension, as long as they didn’t have any other earnings.
However, two further years of increases (even at the minimum level of 2.5%) would push retirees over this line by 2027.
| Tax year | Full new state pension (annual amount) |
|---|---|
| 2024/25 | £11,502 |
| 2025/26 | £12,158 (estimate, based on a scenario where wage growth is the highest measure and comes in at 5.7%) |
| 2026/27 | £12,461 (estimate, based on the minimum scenario where the state pension is increased by 2.5%) |
| 2027/28 | £12,773 (estimate, based on the minimum scenario where the state pension is increased by 2.5%) |
These calculations are all based on the standard amounts paid to recipients of the full new state pension. However, in practice, complexities in the system mean some pensioners could be crossing the threshold with their state pension already.
There are two different pension systems currently in operation in the UK (the old state pension and the new). As a result, there is “huge diversity in the amount of state pension which people receive,” says former pensions minister Steve Webb.
“The new state pension system is designed around a standard rate, but a significant minority of new state pensioners may receive more than the standard figure because of transitional protection of accrued rights built up prior to 2016,” he explains.
Webb’s analysis with consultancy firm Lane, Clark and Peacock reveals that around 2.5 million pensioners already receive state pensions that exceed the income tax threshold.
A rising tax burden for retirees
Of course, the state pension isn’t the only income most pensioners receive. Most people pay into a workplace pension over the course of their working life, while others may have a private pension or SIPP.
This means some pensioners are already paying a significant amount of income tax – and the burden is growing thanks to the effects of fiscal drag.
Tax thresholds have been frozen for over three years now, and aren’t expected to go up until 2028 at the earliest. As a result, the latest HMRC data suggests around 8.51 million pensioners will be liable for income tax in the 2024/25 tax year. That’s 660,000 more than in 2023/24.
Meanwhile, those who already pay income tax on their pension, but at the basic rate, could find themselves pushed into a higher tax band.
In the lead-up to the general election, the Conservatives promised to increase the personal allowance for pensioners as part of their “triple lock plus” election pledge. However, this was consigned to the policy dustbin when Labour won the general election.
Labour has promised to conduct a large-scale pensions review as part of this Parliament, but we don’t yet know what this will mean for tax rules, if anything. Further detail could be revealed in Rachel Reeves’s first Budget.
There has been a fair amount of speculation, particularly after Rishi Sunak accused Labour of planning to introduce a “retirement tax”. We have addressed some of these claims in recent pieces:
- What does a Labour government mean for your pension?
- Will Labour introduce a retirement tax?
- Will Labour axe the 25% pension tax-free cash?
- Key priorities for new pensions minister Emma Reynolds
In the meantime, the good news is that pensioners can cut their tax bill by arranging their finances in a tax-efficient way. See our top tips: “Five steps to reduce your tax bill in retirement”.
-
A luxurious haven: Four Seasons Resort Mauritius at AnahitaThe Four Seasons Resort Mauritius at Anahita is close to paradise
-
Managing your money in retirement - 5 golden rules to follow to avoid a shortfallWe look at the cash strategy you need to follow to manage your money in retirement, after research shows more than a third of retirees overspend
