New figures from the Office for National Statistics (ONS) show that Consumer Prices Index (CPI) inflation reached 10.1% in September. This matches the 40-year high inflation hit in July and remains well above the UK Government’s target of 2%.
The September reading is important for the Treasury as the figure is commonly used as the benchmark to raise benefits and State Pension for the following April. However, Chancellor Jeremy Hunt would not commit to the uprating when asked earlier this week and a promise from Liz Truss to “protect” the Triple Lock rule - before she resigned as Prime Minister - may not be valid when the Budget is delivered on October 31 and a new leader of the Conservative Party is in office.
If the UK Government uprates State Pensions by 10.1% next April, this would see New State Pension payments go up from £185.15 per week to £203.85 and Basic State Pension weekly payments rise from £141.85 per week to £156.20.
While that would undoubtedly be a boost for 12.5 million older people claiming the contributory benefit, it could see another 500,000 of them dragged into the “tax net”, according to a former Liberal Democrat pensions minister, Sir Steve Webb, who is now a partner at pensions specialists LCP (Lane Clark & Peacock).
He said frozen income tax thresholds, combined with pension increases next year, may potentially pull at least another half a million pensioners into the income tax net.
LCP looked at HM Revenue and Customs (HMRC) figures to make the estimates. It said that in April 2022 the State Pension rose by only 3.1%, yet as income tax thresholds were frozen the number of over-65s paying tax rose by 390,000 between the financial years 2021/22 and 2022/23.
With a much larger State Pension increase expected in April 2023, a bigger jump in the number of over-65s paying tax is expected.
LCP calculations suggest this is likely to see at least half a million more being added to the total. It said that many occupational pensions will be increased because of inflation, although the exact rules may vary.
Sir Steve said: “Freezing tax thresholds is a stealthy way of raising tax at the best of times, but at a time of soaring inflation, freezing thresholds has a profound effect.
“During this Parliament we have already seen over a million extra pensioners dragged into the tax net, and next April’s increase is likely to add at least half a million more.
“If the Chancellor is looking for ways to cut taxes and ease cost of living pressures on those on modest incomes, he could do worse than review the long-term freeze of income tax allowances.”
A Treasury spokesperson said: “Over the last decade we have increased the personal allowance people have before they pay any income tax from £6,475 in 2010 to £12,570 today.
“This has lifted millions of the poorest out of paying any income tax at all, and meant a real-terms tax cut of £750 for 27 million people.
“The vast majority of taxpayers will still pay the basic rate and the UK still has the highest personal allowance in the G20.”
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