Analysis indicates that nearly 750,000 additional retirees might become liable for income tax starting next year, raising concerns about the financial impact on this demographic.
Currently, approximately 8.5 million individuals aged 66 and above are subject to income tax, a figure projected to increase to 9.2 million from April 2026, according to Sir Steve Webb, former Pensions Minister.
This prediction follows the latest projections from the Office for Budget Responsibility (OBR), which forecast a 4.6% increase in the state pension next year, adhering to the triple lock mechanism.
Under this system, the state pension escalates annually by the greater of either wages, inflation, or 2.5%. Recipients of the full new state pension could face taxation with just an additional £46 of income.
Moreover, by 2027, the entire benefit is expected to become taxable, an outcome that was labelled “Labour’s retirement tax” by the Conservatives during the previous general election.
The forthcoming adjustment, as detailed by the OBR, is likely to align with wage increases.
This adjustment will elevate the old state pension to £9,597 annually and the new state pension to £12,524 annually. With tax thresholds remaining static, more retirees are anticipated to fall into the income tax bracket.
Sir Steve, now a consultant at LCP, highlighted that the ongoing freeze on tax-free allowances, combined with the pension increases linked to earnings, will inevitably result in an increasing number of pensioners paying income tax in the near future.
He noted that we could see an influx of around 700,000 pensioners, who currently do not pay income tax, being subjected to it within the next two years.
The tax-free personal allowance has been maintained at £12,570 since 2021.
Rachel Reeves, the Chancellor, confirmed during her inaugural Budget and this week’s Spring Statement that this threshold would be upheld until 2028, with no alterations made.
Previously, the Conservatives had committed to introducing a “triple lock plus” in their election pledge, which would have raised the allowance for older individuals and ensured the state pension remained non-taxable.
