15 in 16 pensioners could miss new State Pension tax break

The warning comes after the latest earnings figures showed wages grew by 3.9 per cent, making it highly likely that the earnings element of the Government's triple lock will determine next April's state pension increase.

Unless inflation jumps sharply over the next two months, earnings growth will be higher than inflation and will therefore set the increase.

The figures are provisional and could be subject to a usually minor revision next month.

What would the State Pension be if the figures don't change?

If the 3.9 per cent figure remains unchanged, the new state pension would rise from £241.30 a week to around £250.70.

That would be an increase of £9.40 a week, or almost £500 a year.

But the boost could come with an unwelcome sting in the tail for some pensioners.

Under the current tax rules, the calculation for the state pension next year would use one week at the current £241.30 rate and 51 weeks at the new £250.70 rate.

That would produce annual income of around £13,027.

What is the current HMRC personal allowance?

With the personal allowance currently frozen at £12,570, someone wholly dependent on the new state pension could therefore face an income tax bill of around £91.40.

However, the Government has said a narrowly defined group of pensioners will not have to pay the tax.

This covers people wholly dependent on the new state pension, with no private pension, or those receiving the old basic state pension, "with no increments".

The Government has not yet explained exactly how the exemption will work.

But pension consultants LCP estimates that, based on the policy outlined so far, just one in 16 pensioners could benefit.

Steve Webb, partner at LCP, warned that the proposed solution could create a new layer of unfairness.

“Under the triple lock formula, the new state pension will rise next April by the highest of the growth in wages, prices or 2.5%. Based on today’s figures, it is highly likely that it will be average earnings growth which comes out on top. Those on the new state pension can expect to see an increase of nearly £500 per year next April.

"But the sting in the tail is that this will take the standard rate of the new state pension above the tax threshold. The Government’s plans to address this point are a mess, and likely to benefit only a small fraction of pensioners.

"They will also create unfairness between different groups of pensioners and between pensioners and low-paid workers, who do not qualify for any exemption.”

What happens to the old state pension?

Pensioners who reached state pension age under the old system could also see a sizeable increase.

The basic state pension is currently £184.90 a week and could rise to around £192.10, adding roughly £7.20 a week or around £374 a year.

These pensioners would also receive an inflation-linked increase on any additional state pension they receive, such as SERPS or the State Second Pension.

The final figure for the triple lock cannot be confirmed yet because the inflation measure used is September CPI, which will be published in October.

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CPI inflation was 2.9 per cent in the year to July, while the August figure is due to be published on Thursday.

The Bank of England's latest forecast suggests inflation could be around 3.2 per cent by the fourth quarter, still below the current 3.9 per cent earnings growth figure.

The Office for Budget Responsibility had previously assumed a 3.7 per cent triple-lock increase for next year.

A 3.9 per cent rise would therefore be slightly higher than expected – giving pensioners a welcome boost, but potentially pushing the new state pension further into the tax net.