The real cost of triple lock

[Clitheroekid]

Moderator Message:
Moved this thread to The Economy from DAK (leaving a link). Please report if you think there is a more suitable place. Thanks - Chris

Forgive me if this is a naive question, but I've not managed to find the answer with a quick Google.

We're hearing a great deal at present about how implementing the triple lock is becoming too expensive, and how it may need to be reviewed - this extract from a Money Week article is typical:

"The DWP March forecast expected the total state pension cost to rise to £135 billion in the tax year beginning April 2024. But a bumper wage bill for employers has a knock-on impact on the state pension bill which could rise to a total cost of around £138 billion next year. The cost of the triple lock could hit over £10 billion next year, based on ii calculations. The final bill could be lower if inflation or wages fall during July,” (https://moneyweek.com/personal-finance/ ... ost-surges)

But is that £10 billion a net or gross figure? I understand that approximately half of pensioners are taxpayers, so it would appear obvious that a fair proportion of any extra pension will simply be recouped through income tax. Less obviously, some of it would also be recouped when the pensioners blow their windfall through VAT, fuel duty, excise duties etc.

So if (which is my question) the figures are gross expenditure it would seem to be a considerable exaggeration of the actual cost to the Government.

[Urbandreamer]

The cost of the triple lock could hit over £10 billion next year, based on ii calculations. The final bill could be lower if inflation or wages fall during July,”[/i] (https://moneyweek.com/personal-finance/ ... ost-surges)

But is that £10 billion a net or gross figure? I understand that approximately half of pensioners are taxpayers, so it would appear obvious that a fair proportion of any extra pension will simply be recouped through income tax. Less obviously, some of it would also be recouped when the pensioners blow their windfall through VAT, fuel duty, excise duties etc.

So if (which is my question) the figures are gross expenditure it would seem to be a considerable exaggeration of the actual cost to the Government.

Much has been written on the subject in recent years, but you have to go back a couple of years for it to make any sense. The issue is that it was, and has to a great extent, been put in place to drag pensioners out of poverty. Part of it ensures rising pensions, even in the absence of inflation to counter.

I have no figures upon how many pensioners are tax payers. Currently the state pension is below the personal income tax threshold, so conceivably some pay no income tax. Others may pay small amounts after their allowance, as personal pensions provide enough to live comfortably. Some may pay a lot, working or having big pensions.

As for costs to the tax payer. A brief web search puts this at £112 bill, so the increase seems, unsurprisingly, about the rate of inflation.
Another figure for your interest.
Tax receipts £788 bill, so pension is 14% of tax receipts.

Doesn't leave a lot for other things like the NHS etc does it?
Possibly that's why the government borrows more each year.

Please note that I'm not trying to make a point, just providing facts.

If I were making a point, it would be that the government needs to find somewhere to reduce it's spending, though it doesn't want to.

[UncleEbenezer]

This is a mathematician's answer. Numbers - particularly those which are so far from experience as to defy visualising - are boring. But proportions, trends and sustainability are interesting.

The point about it longer-term is that it implies a continuous, monotonic rise in the proportion of the country's resources going in pension payments.
And that doesn't stop when pensions reach a mere 100% of GDP. It's inherently unsustainable.

Of course the same was true of the double-lock before Thatcher grasped that nettle.

A revised lock could make it sustainable. A double-lock with a high water mark, for instance.

[scotview]

I understand that approximately half of pensioners are taxpayers,

I pay 42% tax on my OAP (Scotland), some pay 0% tax on their OAP.

[GrahamPlatt]

No one has yet mentioned the real need for the rise in UK state pensions:

https://www.thisismoney.co.uk/money/pen ... tries.html

[Lootman]

As for costs to the tax payer. A brief web search puts this at £112 bill, so the increase seems, unsurprisingly, about the rate of inflation.

Another figure for your interest. Tax receipts £788 bill, so pension is 14% of tax receipts.

Does that £788 billion include national insurance contributions? Ideally those would 100% fund state pensions and the system would be self-funding, leaving taxes for other expenditures.

The problem is that NICs have been hijacked for other forms of government spending.

In practice a state pension uses up your personal tax allowance, for most people, and so it means that any and all other income is taxed at 20%, or more. Perhaps it should be taxed at a lower rate, like it is in the US?

[Urbandreamer]

As for costs to the tax payer. A brief web search puts this at £112 bill, so the increase seems, unsurprisingly, about the rate of inflation.

Another figure for your interest. Tax receipts £788 bill, so pension is 14% of tax receipts.

Does that £788 billion include national insurance contributions? Ideally those would 100% fund state pensions and the system would be self-funding, leaving taxes for other expenditures.

That figure is for ALL tax receipts. Income tax, corporation tax, dividends, interest, fuel levies, VAT and yes NI. Oh and NI has been considered a tax by the government and other bodies for some time now.

NI was forecast to get £172 bill.

NI didn't fully funded what it promised, as a brief investigation into it's history would show. Don't forget that it's also intended to fund the NHS and unemployment. Today it may actually cover those costs. The NHS and unemployment look cheap when you look at the pensions bill.

I did actually write a reply to Uncle, then deleted it, as this is DYK. Discussion of government finances and the states contract with those who paid NI rightly belongs upon another board, regardless of how incensed I get on the subject.

This thread purports to question the figures. Sadly I don't think that an answer will be found as I don't think that the data is gathered that would allow that.
Though income tax receipts fall in at £247 bill, we are not going to get a figure for how much of that is paid by those who receive the state pension.
Not everyone over 65 receives the state pension, but here is a link as to why we won't get an answer.
https://www.ons.gov.uk/aboutus/transpar ... theover65s

[ReformedCharacter]

Forgive me if this is a naive question, but I've not managed to find the answer with a quick Google.

We're hearing a great deal at present about how implementing the triple lock is becoming too expensive, and how it may need to be reviewed - this extract from a Money Week article is typical:

"The DWP March forecast expected the total state pension cost to rise to £135 billion in the tax year beginning April 2024. But a bumper wage bill for employers has a knock-on impact on the state pension bill which could rise to a total cost of around £138 billion next year. The cost of the triple lock could hit over £10 billion next year, based on ii calculations. The final bill could be lower if inflation or wages fall during July,” (https://moneyweek.com/personal-finance/ ... ost-surges)

But is that £10 billion a net or gross figure? I understand that approximately half of pensioners are taxpayers, so it would appear obvious that a fair proportion of any extra pension will simply be recouped through income tax. Less obviously, some of it would also be recouped when the pensioners blow their windfall through VAT, fuel duty, excise duties etc.

So if (which is my question) the figures are gross expenditure it would seem to be a considerable exaggeration of the actual cost to the Government.

Today's DT:

Former pensions minister Sir Steve Webb, of LCP, said: “Although the Chancellor faces a big bill for increasing the state pension, he will also see a boost to the tax taken from pensioners. “Roughly one pound in seven that he pays out in higher state pensions will be clawed back in increased tax bills.”

Over eight million pensioners currently pay income tax, according to data from HM Revenue and Customs. Of those, one in 10 do so at the higher rate of 40pc.

The number of pensioners dragged into the income tax net will soar by more than half a million because of the rise, LCP said.

https://www.telegraph.co.uk/money/pensions/news/triple-lock-state-pension-boost-stealth-tax-raid/

RC

[Urbandreamer]

Today's DT:

Former pensions minister Sir Steve Webb, of LCP, said: “Although the Chancellor faces a big bill for increasing the state pension, he will also see a boost to the tax taken from pensioners. “Roughly one pound in seven that he pays out in higher state pensions will be clawed back in increased tax bills.”

Over eight million pensioners currently pay income tax, according to data from HM Revenue and Customs. Of those, one in 10 do so at the higher rate of 40pc.

The number of pensioners dragged into the income tax net will soar by more than half a million because of the rise, LCP said.

https://www.telegraph.co.uk/money/pensions/news/triple-lock-state-pension-boost-stealth-tax-raid/

RC

I'm afraid that is behind a paywall, and I'm suspicious where the figures are coming from, if the ONS doesn't gather them.
However I suspect that it may relate to this, which doesn't have a paywall.
https://ifamagazine.com/well-over-half- ... -webb-lcp/
Or this from the Independent.
https://www.independent.co.uk/news/uk/p ... 09770.html

NOTE, that it doesn't answer the OP's question.

If a single example pensioner, receives £11,502.40, it's still less than the personal allowance.
If next year they receive £12652.64 (10% or £1150 more) then they would pay 20% on £82, or £16.
Of course the numbers are different for those already paying 20%, in which case it would be £240 on the £1150.
However we have no figures for how many pensioners are paying income tax at each rate.

It strikes me that this is not about the numbers, but a principle that some feel that the state pension should not be taxed.

[Alaric]

It strikes me that this is not about the numbers, but a principle that some feel that the state pension should not be taxed.

They have two conflicting policies.There were decisions back in the early days of the coalition both to raise personal allowance and introduce the triple lock. Much later there was a decision to freeze allowances as a means of paying for all the emergencu anti-COVID spending.

When you link pensions to the higher of earnings, prices or 2.5% and also freeze allowances, then the pension increases will catch up with the personal allowance rapidly when you have high growth in earnings, prices or both.

It's a question for politicians at the next election is that if they are unwilling to target an inflation rate of 0%, are they in favour of increasing the numbers either paying tax or paying higher rate tax? If not then what is their policy, perhaps it should be expressed as absolute numbers of taxpayers and percentages paying higher rates?

[Urbandreamer]

It strikes me that this is not about the numbers, but a principle that some feel that the state pension should not be taxed.

They have two conflicting policies.There were decisions back in the early days of the coalition both to raise personal allowance and introduce the triple lock. Much later there was a decision to freeze allowances as a means of paying for all the emergencu anti-COVID spending.

When you link pensions to the higher of earnings, prices or 2.5% and also freeze allowances, then the pension increases will catch up with the personal allowance rapidly when you have high growth in earnings, prices or both.

It's a question for politicians at the next election is that if they are unwilling to target an inflation rate of 0%, are they in favour of increasing the numbers either paying tax or paying higher rate tax? If not then what is their policy, perhaps it should be expressed as absolute numbers of taxpayers and percentages paying higher rates?

Actually while I was out another thought occurred to me.
The state pension has NO PAYE mechanism.
So, we will soon have very many people, who have never managed their own tax before, due to pay tax.

No doubt one of the unintended consequences of recent decisions. I wonder how that will play out.

[swill453]

Actually while I was out another thought occurred to me.
The state pension has NO PAYE mechanism.
So, we will soon have very many people, who have never managed their own tax before, due to pay tax.

There's still a way to go before the (new) basic state pension exceeds the personal allowance.

Maybe it'll not be allowed to do so (hopefully by increasing the allowance).

Scott.

[UncleEbenezer]

Actually while I was out another thought occurred to me.
The state pension has NO PAYE mechanism.
So, we will soon have very many people, who have never managed their own tax before, due to pay tax.

There's still a way to go before the (new) basic state pension exceeds the personal allowance.

Maybe it'll not be allowed to do so (hopefully by increasing the allowance).

Scott.

Surely it was only the more-than-doubling of the personal allowance under Cameron that brought it above the level of the basic state pension?

Which would seem to make the tax-free state pension the historic aberration.

[mc2fool]

Actually while I was out another thought occurred to me.
The state pension has NO PAYE mechanism.
So, we will soon have very many people, who have never managed their own tax before, due to pay tax.

There's still a way to go before the (new) basic state pension exceeds the personal allowance.

The basic state pension is what people who reached state pension age up to 5-Apr-2016 get. The new state pension is what people who reach(ed) state pension age from 6-Apr-2016 onwards get.

There is no new basic state pension. (But we knew what you meant. )

[swill453]

But we knew what you meant.

Well that's all right then.

I don't think either the basic state pension or the full new state pension have ever amounted to more than the personal allowance though.

Picking a few data points at random, it didn't in 1988, or 2008, or 2016.

Refs

https://adviser.royallondon.com/technic ... ion-rates/
https://en.wikipedia.org/wiki/Personal_allowance

Scott.

[mc2fool]

There's still a way to go before the (new) basic state pension exceeds the personal allowance.

Maybe it'll not be allowed to do so (hopefully by increasing the allowance).

Scott.

Surely it was only the more-than-doubling of the personal allowance under Cameron that brought it above the level of the basic state pension?

Which would seem to make the tax-free state pension the historic aberration.

The personal allowance wasn't more than doubled under Cameron or even since. It was £6,475 when the coalition got into power in 2010 and adopted the LibDem manifesto policy of raising it to £10,000 over the following five years, with Osborne raising it to £11,500 for TY2017–18 in his final, 2016, budget. It has been at £12,570 since 2021 and is, as things stand, planned to stay at that until 2026. https://en.wikipedia.org/wiki/Personal_allowance

In 2010 the single person's full basic state pension was £5,077.80, so less than the allowance (see here), although additional state pension could have pushed people over.

(LOL, I see while typing the Scott's found the same refs I did. )

[SebsCat]

Surely it was only the more-than-doubling of the personal allowance under Cameron that brought it above the level of the basic state pension?

Which would seem to make the tax-free state pension the historic aberration.

The personal allowance wasn't more than doubled under Cameron or even since. It was £6,475 when the coalition got into power in 2010 and adopted the LibDem manifesto policy of raising it to £10,000 over the following five years, with Osborne raising it to £11,500 for TY2017–18 in his final, 2016, budget. It has been at £12,570 since 2021 and is, as things stand, planned to stay at that until 2026. https://en.wikipedia.org/wiki/Personal_allowance

In 2010 the single person's full basic state pension was £5,077.80, so less than the allowance (see here), although additional state pension could have pushed people over.

(LOL, I see while typing the Scott's found the same refs I did. )

According to https://www.gov.uk/government/statistic ... nd-reliefs there were increased personal allowances for older people going back to at least 1990, eg in 2010 it was £9,490 for 65 to 74 yr olds, £9,640 for 75+. So massively above the basic state pension level.

[Urbandreamer]

Apparently, the personal income tax allowance is frozen until 2026. It doesn't take too many 8.5% increases in the new state pension to exceed the current allowance.

I'll let you all fire up a calculator app, but apparently the state pension will be £11500 in 2024.
My calculation puts 2025 just under and 2026 over the personal income tax allowance.

Of course inflation could fall, but we shall see.

As suggested by Sebscat, we may see different allowances based upon age. After all it's an easy fudge to avoid the costs and complexity of collecting that tax.

[mc2fool]

The personal allowance wasn't more than doubled under Cameron or even since. It was £6,475 when the coalition got into power in 2010 and adopted the LibDem manifesto policy of raising it to £10,000 over the following five years, with Osborne raising it to £11,500 for TY2017–18 in his final, 2016, budget. It has been at £12,570 since 2021 and is, as things stand, planned to stay at that until 2026. https://en.wikipedia.org/wiki/Personal_allowance

In 2010 the single person's full basic state pension was £5,077.80, so less than the allowance (see here), although additional state pension could have pushed people over.

(LOL, I see while typing the Scott's found the same refs I did. )

According to https://www.gov.uk/government/statistic ... nd-reliefs there were increased personal allowances for older people going back to at least 1990, eg in 2010 it was £9,490 for 65 to 74 yr olds, £9,640 for 75+. So massively above the basic state pension level.

Ah yes indeed. Phased out by Osborne by means of freezing them until the "regular" one caught up....

[mc2fool]

Apparently, the personal income tax allowance is frozen until 2026. It doesn't take too many 8.5% increases in the new state pension to exceed the current allowance.

I'll let you all fire up a calculator app, but apparently the state pension will be £11500 in 2024.
My calculation puts 2025 just under and 2026 over the personal income tax allowance.

Of course inflation could fall, but we shall see.

That figure for 2024 isn't inflation based and while it's a likely one it's not yet finalised.

The triple lock increases pensions the following tax year by the higher of the previous May-July average annual national earnings growth figure and the previous September's increase in CPI (and 2.5%).

The earnings growth figure has been published and is 8.5% but we have to wait for the September CPI figure, although with CPI currently (July) running at 6.8% and dropping it is very likely that the earnings figure is the one that will be applied.