Next year, it is believed, around 400,000 more pensioners in the UK could be dragged into paying income tax as a result of an increase in the state pension, against a background in which the personal allowance is fixed. The supposed “retirement tax” is therefore causing concern, as many more retirees now could well be looking at problems with the taxman. The likes of this jurisdiction lack the tendency towards the personal allowance adjustments that accommodate the increase in state pensions among many elderly people.

A new concern is looming for pensioners in the UK. Around 400,000 retirees are expected to face what some are calling a “retirement tax” starting next year. This tax is not new but is becoming an issue for more people because of the rising state pension, which could push them over the income tax threshold.
The “triple lock” pledge by the government is supposed to mean the boost to a rising state pension in 2025-26 will be guaranteed at 4.5%. The highest of the three measures, wage growth, inflation, or 2.5%, is what this triple lock ensures in the rise of pensions. In a year’s time, wage growth seems to be prevailing—that is, 4.5% between April and June.
This rise means the weekly state pension increases from £221.20 to £231.15. In all, this means £12,061 across the year, which is pretty close to the personal allowance of £12,570. This is what one can make in a year without getting charged an income tax. Unfortunately, the personal allowance has been frozen—so further income will be charged tax.
As the state pension increases, but the personal allowance does not, more and more pensioners will be propelled by the rises into paying income tax, according to Steven Cameron, a pension expert at Aegon. He estimates around 400,000 more retirees could be brought into the income tax net. For many, this might be the first time that they ever deal with income tax, thus bringing both worry and confusion to their doorsteps.
For many years now, the number of pensioners paying income tax has climbed. Given the current situation, the complexity of affairs is such that it is estimated that 2.5 million people are already getting a state pension that is more than the personal allowance. The growing pool of tax payers could mean more people end up entangled with the tax authorities over even the smallest sums of money.
“The link between the state pension and the tax-free allowance needs urgent attention”, Sir Steve Webb of pension consultancy LCP said. He believes that, if not changed, this would yet go from bad to worse, reeling in even more retirees into the tax system.
Adding to the pensioners’ woes is the recent decision by Chancellor Rachel Reeves to strip millions of pensioners of their winter fuel allowance, which helps to pay pensioners’ home heating expenses during the winter. This allowance will be taken away from about 10 million retirees who do not receive means-tested pension credit. This means many pensioners will be at least £200 worse off this winter, further adding pressure to their finances.
For those purely reliant on their state pension, it will be even more difficult. While those receiving pension credit will still receive the winter fuel allowance, otherwise it will have to be borne. The combined loss of that support, added to the loss from the new income tax bill, doubles major concerns by groups for pensioners and independent financial experts.
Shadow pensions secretary Mel Stride blasted the Labour move not to raise the income tax thresholds. He’d warned the assertion “means pensioners, for the first time ever in history, will be liable to income tax, to all intents and purposes a ‘retirement tax'” The tax would take away peace of mind and security that retirees rightly deserve, he reiterated.
On the other hand, a spokesman for HM Treasury justified the government’s stand. He stressed that state pension is designed to make older people feel dignified and show respect. He also added that pensioners for whom their entire income consists of the state pension which has not been deferred, and for whom protected payments are not made, are free from paying any income tax.
That had been a pledge by the Conservative Party at the general election, increasing the personal allowance of retirees in line with the triple lock it promised. It would have excluded pensioners from paying tax on the income that they derived from their state pension. Labour did not rise to match that pledge, although it sought to argue convincingly that it had not balanced that with the “triple lock plus” added to protect pensioners from paying income tax.
Going by current happenings, most pensioners are definitely going to have a hard year ahead of them. As the state pensions are on the increase and personal allowances are not, this has the effect of raising even more costs on the pensioners by terms of income tax. Their situation is further complicated by the loss of the winter fuel allowance on top. It is therefore a very cold winter for many pensioners, drifting into old age with only a desire to enjoy retirement without money worries.