Pensioners across the UK are being told to brace themselves ahead of a pending “retirement tax” on their state pension payments within the next two years, according to new research.
The new Government, under Prime Minister Keir Starmer’s Labour Party, has pledged to keep the level at which tax thresholds frozen until 2027-28 with the personal savings allowance to remain at £12,570.
Experts are sounding the alarm over fiscal drag which takes place when incomes or savings rise during a time when tax allowances are frozen.
This results in Britons being dragged into higher tax brackets and losing more of their money to HM Revenue and Customs (HMRC).
Current estimates suggest that wage growth is expected to raise the state pension past the personal savings allowance threshold by April 2026.
The retirement benefit is guaranteed to rise every year thanks to the triple lock with payments going up by either inflation, average earnings or 2.5 per cent.
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Fiscal drag is pulling pensioners above the personal allowance threshold GETTY The freeze on tax thresholds was introduced by the Conservative Party under former Chancellor Jeremy Hunt.
During the previous Government’s 14 years in power, 2.5 million pensioners have been pulled into paying more tax.
While Labour has pledged to keep the triple lock, its decision to keep thresholds are they are is expected to have a knock-on impact on older households.
Earlier this week, office for National Statistics (ONS) found average wage growth is jumped by 5.7 per cent between March and May.
With inflation easing to the Bank of England’s desired target of two per cent, average earnings is likely to be the determining metric for the next triple lock hike.
If a 5.7 per cent boost to payments is implemented, this would raise the state pension to £12,158 from April 2025.
For 2025, the Bank is projecting a 2.75 per cent increase in average earnings growth which would see the benefit raised to £12,492 by April 2026.
This means the state pension would only be £78 under the personal savings allowance by this point.
Former pensions minister Sir Steve Webb described the current pensions system as a “mess” with more older people likely to face the brunt of fiscal drag.
He explained: “If all you’ve got is the state pension then you don’t have to fill in a tax return.
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Labour is under fire over the so-called “retirement tax”
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“However, it does seem bizarre for the Government to pay the state pension with one hand and then collect very small amounts of tax with the other – the bureaucracy and hassle for citizens makes it pointless.
“The new government should say: if a pensioner only has a regular state pension then they shouldn’t pay tax on it. It’s just a mess, one that more people will be dragged into if this is allowed to happen.”
An HM Treasury spokesperson said: “Older people should be able to live with the dignity and respect they deserve, and the state pension is the foundation for this.
“We are committed to the triple lock, and pensioners whose sole income is the new state pension and who have not deferred or received protected payments do not pay any income tax.”