State pension likely to rise by 4.7% in April

State Pension to Rise by Over £500 a Year — But More Pensioners Set to Pay Tax

People due to start receiving the new state pension from April are expected to see an increase of more than £500 a year, according to the latest wage data. The rise will be determined by the government’s triple lock system, which increases the state pension each April by whichever is highest: 2.5%, inflation, or average wage growth.

The Office for National Statistics (ONS) reported that average earnings, including bonuses, rose by 4.7% in the three months to July — a figure expected to be used to calculate next year’s pension uplift. With September’s inflation rate forecast to come in at 4%, it is likely that wages will again set the measure, making this the third consecutive year the triple lock has been driven by earnings growth.

Almost 13 million people in the UK currently receive the state pension. However, the rise is pushing more pensioners closer to the frozen income tax threshold, meaning from 2027, some may pay income tax on their state pension for the first time.

Sir Steve Webb, former pensions minister and now partner at consultancy LCP, warned:

“It is already the case that nearly three-quarters of pensioners pay income tax, and the freeze in tax thresholds combined with steady pension increases will drag more into the tax net. By April 2027, someone with no other income apart from the full state pension is likely to become a taxpayer.”

The personal tax allowance — the amount people can earn before paying income tax — is fixed at £12,570 until at least 2028. The full new state pension is moving closer to this threshold with every annual rise.

Linda, a retired hairdresser from Wokingham, told the BBC she was worried about the consequences:

“They’re giving it on one hand and taking it from the other. If they raised the tax threshold, it would make a huge difference. I’m fortunate my husband has a decent pension so we can live comfortably, but if I were on my own, it would be very hard.”

Labour Market Cooling

ONS data also showed that wage growth is slowing, with regular pay (excluding bonuses) rising by 4.4% in the three months to July — down from 5% in the previous period and the weakest growth since May 2022.

Liz McKeown, ONS director of economic statistics, said that despite the slowdown, wage growth remained “strong by historic standards.” But KPMG’s chief economist, Yael Selfin, warned pay growth was likely to fall below 4% by the end of the year:

“Demand for workers has dropped sharply as companies face higher costs and slower economic growth. As a result, wage growth is expected to continue to decline.”

The latest figures also showed:

• The unemployment rate rose to 4.7% in the three months to July — the highest since May 2020.

• The number of vacancies fell by 10,000 over the quarter to August.

• Payrolled employees dropped by 8,000 in the most recent month.

The Triple Lock Debate

The triple lock was introduced in 2011 by the Conservative–Liberal Democrat coalition to ensure pensions rose in line with the cost of living. However, the policy has grown far more expensive than initially projected.

The government’s official forecaster warned in July that the cost of the guarantee would be three times higher by the end of the decade than first estimated.

Despite the cost, Chancellor Rachel Reeves has pledged that the Labour government will maintain the triple lock until the end of the current parliament. Work and Pensions Secretary Pat McFadden added:

“We have promised to honour the triple lock for the course of this parliament. It is expected to result in a rise in the state pension of around £1,900 a year by the time of the next election.”

With the state pension now the government’s second-biggest budget item after health spending, the debate over its sustainability — and fairness — is likely to intensify.