State pensioners issued update over 'higher tax allowance' coming under Labour

State pensioners have been issued an update over the possibility of a "higher tax threshold" under the Labour Party government. The Government looks set to hike state pension payments by more than £400 next year as Labour has promised to keep the Tory's Triple Lock promise.

The Triple Lock raises state pension increases every April by whatever number is highest out of inflation, the average UK wage increase, or 2.5%. Lee Anderson of Reform has asked the Chancellor through a written question about the possibility of a higher tax threshold for those above the State Pension age. Treasury Minister James Murray responded on November 1 in the wake of Rachel Reeves' speech.

He said: "The Government is committed to making sure older people can live with the dignity and respect they deserve in retirement. The income tax Personal Allowance will continue to exceed the basic and full new State Pension in 2024-25."

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He added: "This means that pensioners whose sole income is the full New State Pension or Basic State Pension without any increments will continue to not pay any income tax." Increasing the state pension will hit at least 300,000 pensioners with a “retirement tax” as a result of the frozen personal allowance warns former pensions minister Steve Webb.

The former pensions minister and now partner at consultants Lane Clark & Peacock (LCP), said the risk comes from the frozen income tax thresholds. These were initially frozen by the former Tory Government in 2021 and Labour look set to keep the freeze until 2028. This means as incomes rise, more and more people will be dragged into paying tax - which is known as "fiscal drag".

He said: “With tax thresholds frozen yet again in April 2025, even a relatively modest pension rise could drag more than 300,000 more pensioners into the tax net for the first time. Roughly two thirds of all pensioners now pay income tax, typically at the basic rate, so for most people a rise of £400 next April will only be worth £320 once income tax has been deducted”.