Triple Lock 2024 – more thoughts

We noted in a recent Bulletin that the May-July earnings growth figure implies an 8.5% rise in the New and old (Basic) State Pension, assuming that an untweaked Triple Lock formula is applied with effect from April 2024. That assumption, which is beginning to look a little shaky, would have some interesting consequences:

The amounts. The Institute for Fiscal Studies (IFS) calculates that the old State Pension should rise from £156.20 per week to £169.50 and the New State Pension from £203.85 per week to £221.20. Those State Pension benefits that are not Triple Locked (e.g. Additional Pension) look set to see smaller percentage increases – probably around 7% based on September’s CPI figure (due 18 October). In April 2023, the CPI was the Triple Lock factor of choice, so all State Pension elements rose at the same rate.

Treasury cost. The Office for Budget Responsibility (OBR)’s estimate for the 2024 Triple Lock increase, included in the March 2023 Economic and Fiscal Outlook (EFO) was 6.2%. The IFS calculates the extra 2.3% will add £2bn to State Pension spending in 2024/25. That is arguably at least £2bn a year extra as the ratchet effect means that the 2025 increase will start from the 2024 pension level.  

Income tax. We commented in an earlier Bulletin on the interaction of the Triple Lock and the frozen personal allowance. The 8.5% adds a further twist. If in 2024/25 the New State Pension is £11,502.40 a year, it will be £1,068 below the personal allowance. From there increases averaging just over 3.0% a year are needed for the New State Pension to exceed the frozen personal allowance by 2027/28, the (currently scheduled) last year of the six-year allowance freeze.

If the Triple Lock remains after the election – a big if – then once the pension/allowance crossover happens it will take above-inflation increases to the personal allowance to reverse the situation. The Government is dragging a growing number of people into tax – an extra 3.2m over the period of the personal allowance freeze, according to the March 2023 EFO. HMRC is already creaking, so how it will deal with a large influx of new ‘customers’ ought to be a concern for the Treasury. Alongside the rise in State Pension income is the substantial jump in interest rates, which will also create more taxpayers given the personal savings allowance is still at its initial 2016 level.

Intergenerational fairness. A possible 8.5% increase for pensioners inevitably raises the topic of intergenerational fairness, particularly when there is also talk that in-work benefits may rise by 1% below CPI inflation to provide scope for tax cuts. In March 2023, the Low Pay Commission estimated that the National Living Wage (NLW – currently £10.42 a hour) would need to be between £10.90 (+4.6%) and £11.43 (+9.7%) in 2024/25 to meet the Government’s target of the NLW equaling two thirds of median hourly pay by October 2024. The Commission’s central case was £11.16 (+7.1%).

However, those calculations were based on 5.0% earnings growth in 2023 – the OBR projection. The difference between outcome and projections points to a possible NLW rise of around 10%, which is not a figure either the Chancellor or the Bank of England would wish to see. More detail should become clear next month, when the Commission is due to makes its recommendation for 2024.

The first Budget after an election is generally the one that contains the largest tax increases. The next Budget première may be the one that finally kills off the Triple Lock – if neither of the parties puts its preservation in their manifestos. That in turn could become a game of publication date chicken: whoever prints first will effectively make the decision for both parties.

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