Campaigners are urging Rachel Reeves to increase the personal allowance by £1,000 for state pensioners to prevent them from being dragged into the income tax net for the first time.
If the state pension rises above £12,570 next April due to the triple lock, as predicted, the increase could mean around 450,000 people pay tax on their state pension alone.
The former pensions minister Baroness Altmann said the easiest way to avoid this is by raising the personal allowance for everyone by £1,000 from next April and then uprating it on the same basis as the triple lock.
Speaking to The i Paper, she said: “I hope the Government recognises the urgent need to ensure millions more pensioners are not suddenly dragged into the tax net just because of a higher state pension.
“The simplest route would be to increase the threshold.”
According to recent analysis by Deutsche Bank, the new state pension could rise to £12,631 from £11,973 in April 2026 – an increase of 5.5 per cent.
Frozen tax thresholds mean this will breach the £12,570 personal allowance, the point at which income tax is payable, for the first time.
In the October budget, the Chancellor said she would unfreeze the tax thresholds in 2028/29, meaning more pensioners could be dragged into tax brackets before then.
She is facing the prospect of having to make cuts or raise taxes in her spring statement in March in order to meet her fiscal rules.
Reeves has pledged not to fund day-to-day spending by borrowing, but the stagnating economy is threatening to leave her with no ready cash by wiping out her financial headroom.
Pensioners have received bigger rises than usual in the past few years under the triple lock thanks to high inflation rates and wages.
The Government has also been under pressure from pension groups due to the scrapping of the winter fuel payment for all but the most in need and refusing to pay compensation to the so-called Waspi women who claim they weren’t given enough warning about changes to the state pension retirement age.
Caroline Abrahams, charity director at Age UK, said the issue of state pensioners paying income tax is “only going to grow in prominence over the next few years.”
She said: “We agree that it makes no sense for the Government to give with one hand and take away with the other.
“We believe that after years of freezes to personal tax allowances that the time has now come when they should be raised for people of all ages. We continue to urge the Government to ensure that an older person whose only income is from a full state pension doesn’t automatically pay income tax.”
By 2032, around 10 million retirees are expected to be paying income tax, according to calculations by former pensions minister Sir Steve Webb, nearly 2 million more people over state pension age paying tax compared with nowadays.
Other campaigners say the allowance should be increased by £1,000 for pensioners alone.
Dennis Reed, of campaign group Silver Voices, said the Chancellor should protect the “state pension safety net” and raise the allowance in March’s spring spending review.
He said: “The Chancellor must take urgent action to prevent the basic state pension from being taxed from April 2026.
“We are asking for an immediate increase of the lower tax threshold for anyone who is on the state pension by £1,000 and in future years to uprate it on the basis of the triple lock to make sure these state pensioners aren’t taxed.
“This is going to be a crisis for the whole state pension system unless something is done about it. The whole state benefit system is a safety net, and it is compromised if the lower tax threshold is not increased in the coming years.”
The triple lock ensures the state pension keeps up with living costs and rises each year by the highest of either inflation, average wage growth or 2.5 per cent.
Deutsche Bank forecasts growth in average weekly earnings will reach 5.5 per cent in July – higher than the projected inflation figure. Therefore, they predict the triple lock will rise by the same amount in April 2026.
A basic-rate tax payer on the full new state pension alone would pay just over £12 in income tax if the forecast increase were correct.
If retirees were required to pay income tax on their state pension payments through simple assessment, they would not have to file a tax return, as it would come from the source.
Those on basic state pension would also be unlikely to be dragged into paying income tax on state pension alone as they receive a smaller amount.
Retirees who receive the full new state pension will see their payments rise to £230.25 a week, or £11,973 a year, from this April.
These amounts apply to those who reached state pension age – which is currently 66 for men and women – after April 2016, and have the full 35 qualifying years of national insurance contributions (NICs).
The full basic state pension, paid to those who reached state pension age before April 2016, will rise to £176.45 a week, or £9,175 a year.
Until then, retirees will continue to receive their state pension at the current rate of £221.20 a week, or £11,502.40 a year, for those on the new state pension, and £169.50 a week, or £8,814 a year, for those on the basic state pension.
Joanna Elson, chief executive of Independent Age, said: “Many of the older people we support are concerned about the prospect of having to pay income tax on their state pension.
“There needs to be a consensus among all the political parties on the adequate income needed in later life to avoid living in poverty.
“Once this is established, plans must be put into place so that every older person is able to receive this amount.”
Simon Francis, co-ordinator of the End Fuel Poverty Coalition, added: “We’d support these calls [for increasing allowance for pensioners].
“Given the winter fuel payment axe, we need to make sure there is a comprehensive programme of support for older people who are struggling with the cost of living and at rusk of being trapped in cold damp homes in place for next winter.”
Rishi Sunak had warned that Labour’s policies would result in a “retirement tax” on state pensioners income, promising in his party’s election manifesto to avoid the issue through its “triple-lock plus” scheme.
This would see the personal allowance for pensioners increase at least 2.5 per cent or in line with the highest of earnings or inflation.
Labour has committed to applying the triple lock throughout this Parliament to 2029, but it didn’t take on Sunak’s “triple-lock plus” policy.
Tom Selby, director of public policy at AJ Bell, said: “Keeping the personal allowance frozen while increasing the state pension by the triple-lock means the government gives with one hand while taking away with the other.
“There are two ways you can address that – increase the personal allowance or don’t increase the state pension. The former is probably impossible in the short-term given the fiscal situation facing the Chancellor, while the latter would go against the prime minister’s pledge to keep the triple-lock for the rest of this parliament.
“It’s another area where Labour has boxed itself in and, unless they copy the Conservative pledge to create a ‘triple-lock plus’, is probably something people will just have to accept for the time being.”
Jon Greer, head of retirement policy at Quilter, added: “We will soon be in the perverse situation where pensioners are effectively paying back some of their state pension in tax to HMRC due to frozen allowances.
“At this point the political pressure to act quicker could easily grow and cause Labour to take action.
“Pensioners have been big beneficiaries of the triple lock and it has undoubtedly worked in raising pensioner living standards. A consensus on the appropriate level of the state pension and a fair mechanism for maintaining its value over time is essential to prevent annual increases from becoming political flashpoints.”
Baroness Altmann said an increase in tax on pensioners is “undermining the principle of protection provided for state pension increases”.
She said: “It could effectively mean that the increase to state pensions is cut by 20 per cent once someone is over the threshold. But it may also mean that people on means-tested pension credit could be taxed too.
“It certainly means that those on state pension slightly above the pension credit will be much worse off than those who do qualify and receive thousands of pounds a year more in additional tax free benefits, making them far better off than a pensioner with a bit of savings and a slightly higher state pension.”
An HM Treasury spokesperson said: “The state pension is the foundation for ensuring pensioners are able to live with the dignity and respect they deserve, and we are committed to protecting the triple lock which will be worth around £1,700 more in 2029.
“Pensioners whose sole income is the new state pension and who have not deferred or receive protected payments do not pay any income tax.”
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