The state pension will rise by 8.5 per cent in a matter of weeks but many older Britons could be “pushed into” paying more tax as a result.
This is because of the “stealth tax” levied on Britons through the impact of fiscal drag.
Earlier this year, Chancellor Jeremy Hunt reiterated the Government’s promise to maintain the triple lock on retirement benefits.
While this decision has been praised by pensioners, experts are sounding the alarm over the potential consequences of this decision.
Henrietta Grimston, a financial planning director at Evelyn Partners, said the 8.5 per cent boost from April 6 would be “very welcome” for people drawing the state pension.
However, she said the rise “could also push some recipients into paying tax, or into a higher tax threshold”.
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State pensioners could be dragged into paying more tax for the first time
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Under the triple lock, state pensions increase annually by the highest out of the rate of average earnings, inflation or 2.5 per cent.
With an 8.5 per cent increase, the full state pension would be raised from the current £10,600.20 a year to £11,501.22 in April 2024.
However, this hiked payment could lead to older Britons being liable to pay more tax due to the impact of fiscal drag.
This is the term used to describe when someone’s wages or income rise while tax allowances remain at the same level.
During last year’s Autumn Budget, Mr Hunt confirmed that tax thresholds would remain frozen until the 2027/28 tax year.
No one pays tax on income which is below the personal allowance - which has been frozen at £12,570 since 2021-22.
Analysis from Standard Life determined that the full state pension will go from accounting for 70 per cent of the personal allowance in 2019-2020 to an expected 92 per cent in 2024-25.
Steve Webb, the former pensions minister and partner at Lane Clark & Peacock (LCP), believes “millions will be dragged” into paying income tax for the first time.
This is primarily due to the fact even a small private retirement pot combined with the state pension would pull households over the personal savings allowance bracket.
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Older Britons are being urged to check if they will be liable to pay more tax
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Sir Steve said: “Millions of pensioners have been dragged into the tax net for the first time in recent years, primarily because of the multi-year freeze on tax thresholds.
“Many are now at risk of an unexpected letter from HMRC asking for tax they may not have realised was due.
“Any pensioner with a pension next year over £242 per week will have tax to pay, and if they do not have a private pension through which the tax can be collected, they may need to set some money aside for an unwelcome tax demand.”
A Treasury spokesperson said: “We have taken three million people out of paying tax altogether since 2010 through raising the personal allowance, and the Chancellor has said he wants to lower the tax burden further but sound money must come first.”