Millions of older people in the UK risk losing part of their state pension to income tax next year, according to new analysis, despite a pledge by Andy Burnham to protect them.
The analysis suggests only one in 16 pensioners will be shielded from the tax grab when the new state pension crosses the income tax threshold for the first time in April.
Official figures released on 14 September showed that, because of the triple lock, the state pension is due to rise by at least 3.9 per cent next year, taking it to just over £13,000. That is above the income tax personal allowance of £12,570, the amount a person can earn before they start paying tax.
The triple lock guarantees the state pension rises each year by whichever is highest of average earnings growth, inflation or 2.5 per cent. It has driven repeated above-inflation increases in the pension since it was introduced in 2010.
Chancellor under pressure
Ministers have said they will act to protect the poorest pensioners, but Downing Street was unable to say on 14 September how this would work or how many people it would help. Details will be announced at next month's Budget, when Chancellor John Healey is under pressure to find big savings to reassure jittery financial markets that Labour can be trusted with the public finances. The Budget is the government's annual set-piece statement to Parliament setting out its tax and spending plans.
Andy Haldane, a former Bank of England economist who has advised Mr Burnham, warned that markets would continue to drive up the government's borrowing costs unless ministers showed they were serious about curbing spending. Haldane served as the Bank of England's chief economist from 2014 to 2018 before later becoming chief executive of the Royal Society of Arts.
"The markets now suspect that this is a traditional tax-and-spend socialist government with better TikTok videos," he told LBC.
Only one in 16 protected
The Prime Minister's spokesman said the government would bring forward plans "to ensure anyone whose only income is the basic state pension will not pay income tax in this Parliament".
But former pensions minister Sir Steve Webb said this could end up helping only one in 16 pensioners, leaving 94 per cent still paying tax. Webb was pensions minister in the coalition government between 2010 and 2015 and is now a partner at the pensions consultancy Lane Clark & Peacock.
Older pensioners, who do not qualify for the new state pension introduced for people reaching state pension age from April 2016, could miss out on help completely. Sir Steve said: "Fixing this properly by raising the tax threshold for pensioners would cost more than £1billion.
"It looks like that is too much of a headache for the Chancellor, so they are going to look to do something much more restricted, and much cheaper."
A stealth tax years in the making
The new tax trap has been created by the continuing freeze on tax thresholds, which has already dragged millions of people into paying higher rates of income tax.
The freeze was introduced by the previous Conservative government to help pay for the £400billion cost of dealing with the Covid pandemic. It was then extended by former Chancellor Rachel Reeves, who became the first woman to hold the role, until 2031.
It has created what has been called the biggest stealth tax in history, and now looks set to pull in millions more pensioners. At the last general election, the Conservatives unveiled plans for a "triple lock plus" policy that would have raised the tax threshold specifically for pensioners.
Burnham's by-election pledge
During the Makerfield by-election in June, Mr Burnham suggested he was interested in introducing similar protection. Burnham, the Mayor of Greater Manchester and a former cabinet minister who has twice stood for the Labour leadership, said: "What I have heard on doorsteps is pensioners saying the freezing of the personal allowance has dragged more and more pensioners into tax. So I do think you need to look at that issue as well."
He said pensioners felt that what "they have got through one way, they are saying now that it's being taken away in another."
But in office, the Prime Minister has reverted to a previous policy announced by Ms Reeves, which would help only those pensioners with no additional income.
Who is helped, and who is not
Analysis by Lane Clark & Peacock found that fewer than a fifth of the 5.5 million people on the new state pension would be helped by the government's plans. However, it also found that none of the 7.7 million people on the old state pension would be helped.
The old state pension is worth less than £10,000 a year. Around 6.6 million recipients top this up with additional state pensions and private provision.
But they risk missing out on government assistance because they are not solely reliant on the basic state pension, even if their total income is lower than that of someone receiving the new state pension.
