The Department for Work and Pensions and HMRC have implemented a rule change under the Labour government that will shield state pensioners from income tax bills, leaving them £537 better off. This change comes as Chancellor Rachel Reeves maintains the triple lock on state pensions, ensuring they rise in line with inflation, average earnings, or 2.5%, whichever is highest.
Impact of Fiscal Drag on Middle Earners
According to the Centre for Policy Studies report 'Who Wins Under Labour?', fiscal drag – where frozen tax thresholds pull more workers into higher tax bands as wages rise – will quietly erode living standards for millions of middle earners over the coming years. Those earning around £50,000 are among the worst hit, facing a jump from a 28% combined tax rate to 42% on any income over the higher rate threshold of £50,270.
Pensioners and Benefit Recipients Gain
The analysis shows that under OBR forecasts for wage growth and inflation, workers earning around £50,000 today will be worse off by 2030, even as pensioners and benefit recipients enjoy real-terms gains. Pensioners, whose incomes are protected by the triple lock, will be at least £306 better off by 2030/31 in real terms – or £537 better off if the state pension is exempted from income tax. Increases to Universal Credit will increase its value by £290.
Report Highlights
The report adds: "For pensioners and those on the standard allowance for Universal Credit, the picture is rather sunnier. Thanks to the triple lock, a pensioner could expect under the OBR’s forecasts to be at least £306 better off in 2030-31 than they are this year (in real terms). But if, as has been mooted, pensioners are exempted from paying income tax on earnings above the frozen Personal Allowance – the so called 'quadruple lock' – a pensioner today could expect to be £537 better off."
This would also apply if the Government takes the more limited approach of exempting those pensioners who have no earnings outside the state pension from income tax, as Rachel Reeves has promised: those pensioners would gain £537, while others would be £306 ahead on the state-derived portion of their income, if taxed at the basic rate. Meanwhile, thanks to Labour’s big increases in the standard rate of Universal Credit, someone on out-of-work benefits will receive an extra £290, which would be higher for those claiming other benefits, assuming they rise as predicted.
