‘Retirement tax’ to hit 650K more pensioners | Personal Finance | Finance

Many pensioners may be caught off guard by an incoming HMRC bill, as the triple lock update over the weekend has bumped the full new state pension sum up to £11,973, just £597 short of the frozen personal allowance threshold.

Any pensioner earning an additional £600 yearly on top of their state pension is likely to get an income tax bill this year. This includes earnings from sources such as rental property, private pensions, and even other state benefits like Bereavement Allowance.

Data gathered by the Telegraph prior to the rate hike showed 2.6 million retirees receiving the state pension already had incomes surpassing the personal allowance cap.

As a result, these pensioners face the risk of being pulled into higher tax brackets, depending on their total income levels.

Chancellor Rachel Reeves, in her October budget announcement, confirmed the personal allowance limit freeze will persist until the 2027/2028 fiscal year while promising that the triple lock is here to stay.

The connection between these two policies might render the state pension taxable before the current freeze ends.

This tandem policy approach has drawn criticism for being a stealth tax. Even former PM Rishi Sunak lambasted it as “Labour’s retirement tax”.

The triple lock guarantees state pensions inflate annually by whichever is greatest: inflation, wage growth, or a baseline of 2.5%, therefore ensuring a minimum annual rise of 2.5%.

Using the minimum projection, by April 2027 the full new state pension is set to exceed the personal allowance limit by almost £10. The Office for Budget Responsibility, meanwhile, has already forecast a rise of 4.6% next year.

This would leave retirees with less than £100 for 2026 before they start incurring tax on their retirement funds. Telegraph analysis indicates that prior to the weekend’s hike, 249,000 pensioners were already paying over £1,000 in income tax.

Additionally, more than 10,700 have been handing over upwards of £2,000 as income tax during their retirement.

With 650,000 more pensioners surpassing the personal allowance sum, the issue of taxation on retirement income is intensifying.

A spokesperson from HM Treasury said: “We are committed to help our pensioners live their lives with dignity and respect, which is why we have frozen fuel duty and increased the state pension to leave pensioner couples up to £88 better off a month. Our commitment to the triple lock means millions will see their pension rise by up to £1,900 this parliament.”

Many retirees may be unaware that they owe tax and are responsible for making these payments themselves. Unlike work earnings, which can have tax deducted at source, pension tax must be arranged manually by taxpayers.

Instead, HMRC sends a simple assessment calculation through the post at the end of the tax year.

This incurs some cost for the department, and as a result HMRC has previously assured that it won’t pursue pensioners for “tiny amounts” of income tax, as the collection costs would probably exceed the actual amount due.