When the Triple Lock Meets the Big Freeze

Two policies, one collision

Imagine Mike, 72, from Eastbourne. He’s worked most of his life and earned a retirement on the full new state pension and a small workplace pension. He already pays tax on the workplace pension and next April, without anything changing in his life, part of his state pension could be taxed too.

The cause is not a rise in tax or a new tax, but two old policies colliding.

The first policy is the triple lock, introduced by George Osborne’s coalition government in June 2010 and first applied in 2011. Under it, the state pension has risen each year by the highest of inflation, wage growth, or 2.5%. Wages grew 3.9% over the last year, so pensions are set to rise by the same amount.¹

The second is the freeze on income tax thresholds (personal allowance). Instead of rising with inflation, the personal allowance was frozen at £12,570 in 2021 by Rishi Sunak, extended by Jeremy Hunt and again by Rachel Reeves until April 2031.² This policy means that as incomes rise and the threshold doesn’t, more income is ‘dragged’ into tax, giving it its name, fiscal drag. Otherwise known as a stealth tax, it has silently become one of the government’s most reliable revenue raisers. The same freeze applies to the £50,270 higher-rate threshold, so middle earners now pay 40% on a growing fraction of income that would once have been taxed at 20%.

For the last few years, the pension was safely below this threshold, but each April the gap narrowed, and next year it will close. The full new state pension is set to rise to £13,036.40, £466 above the threshold, which means roughly £93 of tax on the state pension itself.³ It is a small sum, but it would turn a pensioner with no other income into a taxpayer for the first time, and that is precisely why it became a political problem.

From temporary fix to collision course

In the past, the state pension and personal allowance have been comfortably apart. The pension, a safety net guaranteeing a basic income after retiring, and the allowance, a ceiling shielding those on lower incomes: nobody expected them to meet.

Rishi Sunak froze personal allowance in the first place to help repay what was borrowed in the Covid pandemic.⁴ It was meant to be a temporary, short-term solution, but Jeremy Hunt extended it initially by two years, and Rachel Reeves by three more. So this ‘short-term solution’ became a not-so-short decade-long policy.

Due to a series of global shocks and structural weaknesses, the UK economy has recently suffered years of high inflation peaking at an annual rate of 11.1% in the 12 months to October 2022, far above the Bank of England’s 2% target.⁵ This led the triple lock to consistently deliver large rises, constantly stacking up, while the allowance has remained exactly the same.

Had the freeze not occurred, personal allowance would now be over £16,000, and the pension (£13,036) far below it.⁶ The cost is not abstract. With the allowance at £16,070 instead of £12,570, a basic-rate taxpayer would keep around £700 a year more; a higher-rate taxpayer would keep around £1,400, if the higher-rate threshold had moved up by the same amount.

Although the 8.4 million people on the older basic pension (rising to around £10,000 a year) will remain below the threshold, those on the full new state pension will cross it. From April, unless an exception is made, pensioners with a small private or workplace pension will see part of their state pension taxed too.⁷

Pensioners were never the target of the freeze.

What the Chancellor can do

John Healey inherited this problem. He didn’t create it, but he has until next month’s Autumn Budget to solve it. All the UK government has said is that those whose only income is the state pension won’t pay tax on it, but they have not explained how.⁸

The promise was made by Rachel Reeves, in an interview with Martin Lewis after the 2025 Budget. When asked whether state pensioners would not have to fill in a tax return, she said: "I make that commitment for this parliament", adding that the Treasury was looking for a workaround so it was not chasing trivial sums.⁹ Under Andy Burnham, Healey's government has confirmed the pledge stands: if your sole income is the basic or full new state pension, HMRC will not ask for a tax return or chase small debts this Parliament. Anyone with a workplace pension, savings interest or part-time earnings still pays tax on everything above £12,570.

That is a smaller promise than it sounds. HMRC estimates that between 800,000 and 1 million pensioners have no income beyond the state pension.⁸ Mike from Eastbourne, for instance, with his small workplace pension, is not among them.

Healey has three glaring options:

• Make state pension exempt from tax. This is the simple option, though no official costing has been published. The government’s promise covers only the 800,000 to one million pensioners with no other income. A full exemption could hand thousands a year to wealthier pensioners with large private pensions, while those relying purely on the state pension would only save around £93. That is the same reason an official review rejected the idea in 2013.⁸
• Unfreeze the personal allowance. This option is the most widely beneficial, helping both workers and pensioners, but it is also the most costly for the government. The freeze on both the personal allowance and the higher-rate threshold is forecast to raise an additional £55.5 billion a year by 2030/31, roughly a third of what the entire state pension costs. Unfreezing both could blow a hole in the public finances that would have to be filled somewhere else.²
• Modify the triple lock. This could slow the pension’s rise towards the threshold. The IFS points to the system used in Australia, where the pension rises in line with average earnings over the long run but gets temporary protection when inflation is higher than earnings.¹⁰ That removes the effect that locks each rise in permanently, which is what makes cost so unpredictable. However, the trade-offs are real: pensioners would lose the guaranteed 2.5% floor when there is low growth, and an earnings link still outpaces frozen allowance, so the collision is delayed instead of avoided. It may also be the hardest to sell politically, as pensioners make up a large share of the electorate and turn out in far greater numbers than younger voters.¹¹ Andy Burnham is trying anyway. At the Labour Party’s conference in September he set out plans to end the triple lock from April 2030 and invest the savings into a National Care Service, with pensions rising by the higher of inflation or 2.5% instead, a removal of the link to wage growth. ¹² It is a plan for the next Parliament, not legislation, and it comes too late to prevent Mike’s hard earned pension from crossing the allowance next April.

On current forecasts, the triple lock will only add around £600 million a year to state pension spending by 2029-30, which is small change against a £154 billion bill. The problem is that every rise is locked in and the next one builds on it. By 2050, the IFS expects the triple lock to cost around £20 billion a year, but the real figure could be anywhere between £5 billion and £40 billion depending on how inflation and earnings move. ¹⁰

More important for the UK government is that this collision revealed a much larger problem. The triple lock was expected to cost around £5.2 billion a year by 2029-30, but the OBR expects this figure to now be £15.5 billion.¹³ At the same time, as a result of the frozen personal allowance, workers are facing years of fiscal drag, so working people are getting more and more of their incomes taxed whilst pensioners are receiving guaranteed rises each year. State pension spending is currently £154 billion a year, comparable to the budgets of the Ministry of Defence and the Department for Education combined, climbing from 3.6% of national income twenty years ago to 4.9% today, and the ascent is expected to continue. ¹⁰

Whatever Healey decides to do, the larger problem is the fact that the two policies were left working alone: the lesson to be learned is that tax thresholds and pension rises can no longer be set in isolation.