I am very aware of concerns raised recently on the freezing of tax thresholds. I am, and always will be, a strong proponent of a low tax economy. I have long called for a clear pathway to be laid out towards lower taxation and lower regulation. I am aware that due to fiscal drag, inflation is currently driving people into higher tax bands, and that pensioners are among those impacted by this.
I am very supportive of indexing all thresholds to aggregate prices to protect the legislated tax structure. I wrote to the Chancellor prior to the previous two financial statements to ask that he uprate all thresholds as a response to inflation. I am disappointed he decided not to do so, though I understand that there were significant fiscal constraints upon him. I have attached my most recent letter to him for your information.
Please be reassured that whilst there may not have been any new announcements in the most recent budget, two major decisions to support pensioners have already been taken and announced as I am sure you are aware.
Firstly, maintaining the Triple Lock. In 2023-24 the State Pension increased by 10.1% and 8.5% this year (2024-25). This means that the basic State Pension is nearly £800 a year higher than if pensions had been uprated by either earnings or Consumer Price Index (CPI) inflation alone since the introduction of the Triple Lock in 2011, and the value of the State Pension relative to earnings has now reached a level not seen since 1980.
Increasing the State Pension. The 8.5% increase in the State Pension 2024-25 which starts on 8th April means pensions go up £900 a year – the highest figure on record (not including the special pandemic extra payment) and this means the basic state pension has gone up £3,700 since 2010:
So, the current position is that:
-
the basic State Pension will rise by £13.30 to £169.50 a week (for those who reached pension age before 6th April 2016)
-
The new State Pension will rise by £17.35 to £221.20 a week (for men born on or after 6 April 1951 or a woman born on or after 6 April 1953 with at least 10 years NI contributions)
The £900 per year increase in pension is the same as the £900 of tax saved in cuts for workers from their National Insurance at the Autumn Statement and Budget combined (NI is not paid by pensioners). So, both pensioners and workers are seeing a real improvement in their real income.
Your State Pension, under this government, will be protected by the Triple Lock again in the next Parliament - a manifesto commitment made now that will be stuck to.
Other help for pensioners. Meanwhile, around 12 million Winter Fuel Payments and Pensioner Cost of Living Payments have provided vulnerable households with up to £600 to help with energy bills which will start to fall in April, offering greater financial flexibility.
Applications for Pension Credit have also greatly increased by 73% over the last 12 months, allowing vulnerable pensioners access to much-needed support including up to £3,300, NHS dental treatment and a free TV license for over 75s.
Ok, but what more about people being “sucked into” higher income tax of private pensions?
Pensions - a form of saving - vary in who contributes what (state/employer/individual), whether the investment risk is taken by the individual (Defined Contribution) or the pension scheme (Defined Benefit) - or a hybrid of the two.
And they differ in tax on the three elements: is the amount you put in pre- or post- tax: are the dividends taxed or rolled up free of tax; and is the result (your income) then taxed or not.
In the UK most savings as a pension are free or exempt of tax, as is the growth from dividends; but the income (like all income) is taxed. This can be described as Exempt Exempt Taxed (or EET).
Other pools of savings (like ISA) are the opposite: your savings come out of taxed income but you can later cash them in tax free (or TEE).
With the doubling of the tax free allowance under Conservatives post 2010, and the increase of £3,700 on the basic state pension since 2010, pension income has grown.
It’s inevitable that as annual pension income grows it attracts tax (like salary income) - and so attract 20% tax for income between £12,571 - £50,270 and thereafter 40% for income for anything over £50,271.
That is correct, but it is 20% or 40% only of the relevant parts of your earnings. The tax free element remains tax free whatever you earn. So the extra £1,000 pa from raising the tax free allowance remains a benefit you keep. Only the higher elements are caught. And although you may pay 20% on part of your income, or even 40%, you are still keeping the lion’s share of an increased pension. So you:
-
Keep the same extra thousand pounds a year from the increase in tax free amounts:
-
Get the increase this year of £900 on the basic state pension (now £3,700 pa more than 2010
-
If your pension is between £12,571-£50,270 then you pay 20% tax on that part of your pension - so you will always be much better off having saved more.
What does this mean for you?
Over the last few years, pensioners have seen the greatest increase to their pensions since the 1980s with high levels of support for bills and access to other services, and greater financial flexibility for the most vulnerable pensioner households.
This is a party of Government determined to continue to look after our pensioners, through the Triple Lock, while making sure that workers are looked after properly through increases to the National Living Wage.
I know pensions are complicated and important so if you have any questions please do email me on robert@robertcourts.co.uk
