The increase means the full new state pension will rise by £900 to £11,501 – edging closer to the basic rate income tax threshold.
The personal allowance is due to be frozen again at £12,570, and any taxable income above that will be taxed.
It means, on top of last year’s 10.1 per cent rise, many more pensioners, including those with modest private incomes, will be dragged into the income tax net.
A further state pension rise of 8.5 per cent would be expected to increase the number of taxpaying pensioners to 9.15 million, an increase of around 650,000, according to LCP
Between 2022/23 and 2023/24, HMRC figures suggest that the number of those aged 65+ who pay income tax increased by around three-quarters of a million from 7.73 million to 8.5 million off the back of the April 2023 state pension increase.
A further state pension rise of 8.5 per cent would be expected to increase the number of taxpaying pensioners to 9.15 million, an increase of around 650,000, according to LCP.
Steve Webb, partner at LCP, said: “Today’s figures for earnings growth are likely to mean a second successive significant cash increase in the value of the state pension, following on from this year’s 10.1 per cent increase.
“Alongside a continued freeze of the tax-free personal allowance, this is likely to drag well over half a million more pensioners into the income tax net.
“Once again, ‘stealth’ taxation proves a convenient revenue raiser for the Chancellor.”
Jason Hollands, managing director at wealth management firm Evelyn Partners warned the triple lock and Chancellor’s multi-year freeze on personal tax allowance will lead to a “notable policy showdown”.
He said: “Both Conservatives and Labour have pledged a commitment to the triple lock in their manifestos for the upcoming election, and the policy of the current Government is to keep the personal allowance frozen until at least April 2028 at £12,570, with no indication of an alternative policy from Labour.”
If the full new state pension does rise by 8.5 per cent to £11,501 next year, then in the subsequent three years, triple lock increases of just a sliver greater than three per cent would take the annual state pension above the annual personal allowance, Mr Hollands said.
The state pension increases annually by whichever is the highest out of average earnings, inflation and 2.5 per cent, a policy known as the triple lock
Mr Hollands warned: “That then presents a conundrum to the government of the time: create an administrative and political headache by taxing the state pension, possibly at source – which would be massively unpopular among the more than 13 million people then expected to be of state pension age - or make the headache go away by raising the personal tax allowance for everyone.”
The state pension increases annually by whichever is the highest out of average earnings, inflation and 2.5 per cent, a policy known as the triple lock.
The mechanism was introduced in 2011, and temporarily suspended in April 2022 as the coronavirus pandemic led to artificially inflated average earnings statistics.
The state pension has risen £3,158 in real terms since 2011 when the triple lock was introduced, according to interactive investor calculations, but is still one of the lowest in Europe.