A looming financial shock is set to hit millions of retirees across Britain, as the full new state pension is on track to surpass the tax-free personal allowance threshold within the next few years.
The controversial fiscal drag phenomenon, fueled by frozen tax allowances and rising pension values, threatens to pull thousands of pensioners into the tax system for the very first time.
The Triple Lock's Double-Edged Sword
The government's triple lock policy, which guarantees state pensions increase by the highest of earnings growth, inflation or 2.5%, is ironically creating this tax trap. While protecting pension values, it's simultaneously pushing them toward the tax threshold at an accelerated pace.
Experts at investment platform AJ Bell project the full new state pension could exceed the frozen £12,570 personal allowance as early as 2027/28. This would mean pensioners receiving just the state pension would suddenly find themselves with a tax liability.
Who Will Be Affected?
The impact will be felt most sharply by:
- Retirees relying solely on the state pension
- Those with small additional incomes from part-time work
- Pensioners with modest savings interest
- Those who retired after April 2016 on the new state pension
Currently, an individual needs an income above £12,570 to pay income tax. With the state pension currently at £11,502 and rising, the gap is narrowing alarmingly quickly.
The Numbers Behind the Crisis
Analysis reveals the stark reality facing pensioners:
- 800,000 additional pensioners are expected to be pushed into income tax by 2027/28
- The full new state pension has increased by over £2,500 since 2016/17
- The personal allowance has been frozen since 2021/22 and will remain so until 2027/28
This perfect storm of rising pensions and static thresholds represents a significant stealth tax on retirement incomes.
What This Means for Retirees
Pensioners who never previously completed tax returns may need to register with HMRC. Many will face the complexity of the tax system for the first time in their lives, potentially requiring professional advice to navigate their new obligations.
The situation highlights the growing tension between protecting pension values through the triple lock and the government's fiscal policy of freezing tax thresholds to increase revenue.
