Rishi Sunak has pledged to unfreeze the personal allowance for pensioners in an attempt to shore up his vote among the elderly.
The ‘triple lock plus’, as the policy is known, will see the personal allowance for pensioners increase at least 2.5 per cent or in line with the highest of earnings or inflation.
The personal allowance—the amount of tax-free income that can be earned in a year—has been frozen at £12,570 since 2021 and will remain so until April 2028.
The state pension, meanwhile, is worth £11,542 and, thanks to the triple lock, is expected to exceed the personal allowance in 2027. This would be the first time that the state pension has exceeded the personal allowance, dragging more retirees into paying income tax.
Sunak’s ‘triple lock plus’ announcement will guarantee that pensioners’ personal allowance will always be higher than the level of the new state pension.
The government said the policy would ensure millions of pensioners would not have to pay income tax on their state pension, costing around £2.4bn a year by 2029-2030.
However, experts at the Institute for Fiscal Studies (IFS) pointed out that about half of the benefit for pensioners comes from not going ahead with the planned tax rises in the form of frozen tax thresholds.
“It is rather like taking £100 off someone, giving them £200, and expecting them to think they are £200 better off,” the think tank said.
The think tank warned that the costs could be higher than the £2.4bn pencilled in by the Conservatives if the economy continues to be buffeted by global shocks, as it has been over the past five years.
The IFS also said the policy was actually a reversal of Conservative tax policy since 2010.
Until 2010, pensioners enjoyed a higher tax-free allowance than the rest of the population. In 2010-11, the personal allowance was £6,475 for people under 65 but £9,490 for those aged 65 to 75.
Since then, the IFS said the real value of the personal tax allowance for pensioners is currently more than 10 per cent below what it was in 2010. By contrast, the allowance for working age people is about 30 per cent higher, even after recent freezes.
This has contributed to the share of those aged over 65 paying income tax rising from 49 per cent in 2010-11 to 62 per cent in 2022-23.
“The proposal to ‘triple lock’ the income tax allowance for pensioners is another example of Conservatives proposing to undo their own tax policies,” Paul Johnson, director of the IFS said.
“Pensioners used to have a higher tax allowance than working-age people, but since 2010 the tax allowance for pensioners has been cut by more than 10 per cent while that for working age people has risen by 30 per cent,” he continued.