Under the triple lock, the state pension is anticipated to rise by at least 8.5 percent in April 2024, but hundreds of thousands of retirees will not see the entire benefit since they will be brought into the income tax net.
The complete new state pension will rise by £900 to £11,501, bringing it closer to the basic rate income tax threshold.
The personal allowance is set to be locked at £12,570 once more, and any taxable income above that amount will be taxed.
It means that, in addition to the 10.1% increase last year, many more retirees, including those with modest private incomes, will be brought into the income tax net.
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.”
If the full new state pension rises by 8.5% to £11,501 next year, triple lock increases of less than 3% over the next three years would push the annual state pension above the yearly personal allowance.
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.