Pensioners are “guaranteed” to be taxed on their state pension alone for the first time in a couple of years, according to damning analysis from a former Government minister.
Steve Webb, a partner at LCP, is warning that the full, new state pension will exceed the current tax-free allowance by 2027.
During her Autumn Budget, Chancellor Rachel Reeves reiterated Labour’s commitment to the triple lock and confirmed state pensions will rise by 4.1 per cent in April 2025 to £230.25 per week
Reeves also announced that she will not the extend the current freeze on tax-free thresholds, which is set to continue until 2028.
However, Webb is sounding the alarm that the amount provided by the full new retirement benefit will exceed the personal saving allowance of £12,570.
Based on the former pensions minister’s findings, this will happen by 2027 if the triple lock remains in place over the next two years.
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New analysis claims state pensioners will pay tax on their payments by 2027
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Under the triple lock, state pensions increase every year by either the rate of inflation, average earnings or 2.5 per cent; whichever is higher.
Taking into account a minimum rate hike of 2.5 per cent, the state pension will jump to at least £236 a week by April 2026, and £241.90 in April 2027.
As such, the annual payment rate for the new state pension will come to £12,578 annually, just above the £12,570 tax threshold.
According to Webb, this may result in hundreds of thousands of pensioners being taxed on just £8 per year, with a tax bill of £1.60.
Furthermore, if tax-free personal allowance then rise by CPI inflation while the pensions go up by more, then fiscal drag will happen indefinitely.
This is the term used to describe when tax allowances are frozen over a period of time when incomes and inflation are rising.
As a consequence of this, more Britons find themselves being pulled into higher tax bands and paying more hard-earned cash to HM Revenue and Customs (HMRC).
Webb broke down the likely impact on pensioner incomes if the triple lock remains in its current iteration over the years to come.
Pensioners are being urged to prepare for a potential stealth tax raid over the next two years
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He explained: “A combination of an increasing state pension and frozen tax thresholds means we will soon be in the nonsensical situation where the new state pension will be just a few pounds above the income tax threshold.
“This means that people whose only income is the standard new state pension will be dragged into income tax.
“Long gone are the days when retirement meant no longer having to deal with the tax office.”
The state pension is due to rise by 4.1 per cent in April 2025.