UK Pay Growth Slows to 3.9% as Bank of England Weighs 3.75% Rate Hold

Q: Could a modest wage slowdown inadvertently push millions of UK pensioners into a new tax trap next April?

Yes. A relatively modest slowdown in wage growth could still trigger a tax problem for many UK pensioners next April because the state pension is likely to rise by more than the frozen £12,570 personal allowance. Under the triple lock, next April’s uprating is based on the highest of wage growth, inflation or 2.5%. The latest earnings figure is 3.9%, and that is currently the leading candidate to set the increase. On that basis, the full new state pension would rise from about £12,548 a year to roughly £13,036, taking it above the income tax threshold by around £466. That does not mean millions of pensioners who live only on the state pension would suddenly face large tax bills. The likely tax due on the amount above the allowance would be small, roughly £90 a year at the basic rate. But it would create a new administrative and political problem because the state pension is taxable income, yet it is paid without tax being deducted at source. For pensioners with private pensions or other income, HMRC can usually collect any extra tax through their tax code. The sharper issue is for people whose only income is the state pension. Experts including LCP’s Steve Webb have warned that, without government action, they could be pulled into HMRC’s “simple assessment” system for the first time. Ministers have said those wholly dependent on the state pension will not be made to pay tax, but they have not yet set out how that will work. That unresolved detail is the real tax trap.

3 articles · Updated · The Guardian · Sep 15

Average UK earnings including bonuses rose 3.9% in the three months to July, down from 4.1% and matching forecasts, as households face a renewed cost-of-living squeeze from higher energy prices.
The softer pay data landed days before the Bank of England’s Thursday decision, where investors expect rates to stay at 3.75% even as oil above $107 a barrel and August inflation seen above 3% revive price pressures.
Labour-market cooling continued: vacancies fell to 702,000 in the three months to August from 706,000, and payrolls edged lower, led by retail and hospitality.
Unemployment held at 4.9%, defying expectations for a rise, while regular pay excluding bonuses stayed at 3.5%, giving the Bank mixed signals on whether inflation risks or labour-market weakness matter more.
The 3.9% headline also matters beyond monetary policy because it is expected to set this year’s state-pension increase under the triple lock.