The Conservative Party’s recent announcement of a “triple lock plus” policy for pensioners’ personal tax allowances has sparked considerable debate.
At present all individuals in the UK regardless of age are entitled to a personal allowance of £12,570 before becoming liable for income tax.
The personal allowance threshold has been frozen since April 2021 resulting in an increasing number of pensioners being drawn into the tax net as their state pensions and other retirement incomes rise.
Over the past decade, a growing proportion of retirees have found themselves liable for income tax due to a combination of factors, including stagnant personal allowance levels and the phasing out of higher tax-free thresholds specifically for pensioners.
As an example for the current 2024-25 tax year the state pension saw an 8.5% increase making the full amount of the new state pension now £11,502 annually (almost £1,900 higher than it was two years ago).
On the other hand the tax free personal allowance for the 24/2025 tax year has stayed at £12,570 resulting in any pensioner earning more than £1,068 from sources other than the state pension being liable for tax.
By reintroducing a pensioner specific personal allowance and indexing it to the “triple lock” mechanism, the Conservatives seek to counteract this trend.
The policy aims to safeguard pensioners’ incomes from the erosive effects of inflation and ensure their income tax burden remains proportionate to their financial means.
How would the triple lock plus work for pensions?
The triple lock plus approach aims to enhance financial security for retirees by tying increases in their tax-free allowance to the highest of three metrics: average earnings growth, inflation rates, or a fixed 2.5% annual rise.
Under the Conservative Party’s plan, pensioners would enjoy a separate, higher personal allowance explicitly tailored to their circumstances.
This allowance would be subject to annual increases determined by the “triple lock plus” formula, ensuring it remains comfortably above the full flat-rate state pension, currently set at £11,542 per year.
The “triple lock plus” mechanism would mandate that the pensioners’ personal allowance be raised annually by the highest of the following three factors:
- The rate of average earnings growth across the UK.
- The prevailing rate of inflation, as measured by the Consumer Price Index (CPI).
- A fixed minimum increase of 2.5%.
This approach is modelled after the existing “triple lock” system used to determine annual increases in the state pension, albeit with the addition of the 2.5% minimum rise.
How much pension tax can be saved?
According to Conservative Party estimates, the “triple lock plus” policy could potentially benefit approximately 8 million pensioners, with each individual saving around £100 in the first year of implementation.
As the policy matures and the personal allowance continues to rise, these pension tax savings are expected to compound annually.
It’s crucial to note that the policy would only directly benefit pensioners with taxable incomes exceeding the current personal allowance threshold of £12,570 per year.
This includes those receiving the full flat-rate state pension, as well as those with additional sources of retirement income, such as private pensions or investment returns.
The Conservative Party has projected the initial cost of implementing the “triple lock plus” policy to be approximately £2.4 billion per year by the end of the next parliamentary term.
Implications for the “Triple Lock Plus” pension proposal
As with any significant policy proposal, the “triple lock plus” initiative has both pros and cons which have been pointed out by various stakeholders and political factions.
While the triple lock has been credited with improving pensioner incomes and reducing poverty rates, it has also attracted criticism for its escalating costs and potential long term sustainability issues.
According to estimates from the Institute for Fiscal Studies (IFS), the government now spends approximately £11 billion more per year on state pensions than it would have if the pension had simply been uprated in line with earnings growth since 2010, as originally legislated.
This substantial additional expenditure has fuelled debates about the affordability of the triple lock mechanism in the long term especially when taking into consideration economic uncertainties and other competing fiscal priorities.
