Retirees approach ‘bizarre tax cliff-edge’ as thresholds remain frozen under Rachel Reeves
Daily Telegraph
Almost three quarters of a million more retirees could be forced to pay income tax from next year, analysis suggests.
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Around 8.5 million people aged 66 and over already pay tax each year, but this could rise to 9.2 million from April 2026, Sir Steve Webb, the former pensions minister, said.
The figures come after a new forecast, released this week by the Office for Budget Responsibility, suggested that the state pension will rise by 4.6pc next year in line with the triple lock.
Anyone on the full new state pension would start paying tax after just £46 of additional income. The benefit itself is on course to become taxable by 2027 – a phenomenon the Conservatives dubbed “Labour’s retirement tax” in last year’s general election campaign.
The state pension rises each year by the highest of wages, inflation or 2.5pc under the triple lock.
According to the Office for Budget Responsibility (OBR), the next increase is expected to be in line with wages.
This would raise the old state pension to £9,597 a year and the new state pension to £12,524 a year – leaving frozen tax thresholds to drag hundreds of thousands more people into income tax.
Sir Steve, now of consultancy LCP, said: “The continued freeze on tax-free allowances, coupled with earnings-linked increases to the state pension, means that more and more pensioners are set to pay tax in the coming years.
“We could easily see another 700,000 pensioners who do not currently pay income tax dragged into the tax net over the next two years.”
The tax-free personal allowance has been frozen at £12,570 since 2021.
Rachel Reeves, the Chancellor, confirmed this would remain in place until 2028 in her maiden Budget and opted not to make any changes during this week’s Spring Statement.
Before the election, the Conservatives pledged to introduce a “triple lock plus” that would increase the allowance for older people and ensure the state pension never became taxable.
However, the policy was not adopted by Labour, and the state pension is currently on course to be taxed by 2027.
Jon Greer, of wealth manager Quilter, said state pensioners were approaching a “bizarre tax cliff-edge” where they were just a year away from handing some of their payment straight back to the Exchequer.
He said: “This situation is the result of the triple lock producing some significant increases in the state pension due to high inflation and earning figures while the Government has failed to uprate tax thresholds in tandem.
“It also adds to the debate of what looks like the inevitable review of triple lock. Any change must be handled carefully. The state pension is the single largest area of welfare spending and a vital source of income for millions.
“But if Labour is serious about building a fairer and more sustainable system, it cannot ignore the long-term pressures the triple lock presents.”