State pension warning: Rachel Reeves's tax grab to hit 230,000 more pensioners

The Chancellor's decision to maintain frozen income tax thresholds means that despite pension increases, more elderly people will cross into taxable territory.

Analysis indicates this trend will accelerate dramatically, with projections suggesting the figure could reach 10 million pensioners paying tax before the decade concludes.

The implications are particularly significant as state pension payments edge closer to the tax-free personal allowance limit, creating a situation where retirement income that has traditionally been exempt from taxation will soon fall within HMRC's reach.

The Chancellor has confirmed that state pensions will rise by 4.8 per cent from April, with recipients of the new state pension seeing their annual income increase by £575, whilst those on the older system will receive an additional £471 yearly.

This brings the full new state pension to £241.30 weekly, approximately £12,548 annually, and the basic state pension to £184.90 per week, around £9,615 per year.

However, Ms Reeves has extended the personal allowance freeze, originally implemented by the Conservative government in 2022, for an additional three years through to 2031.

The £12,570 threshold will remain static whilst pensions continue rising under the triple lock mechanism, which guarantees increases based on the highest of wage growth, inflation or 2.5 per cent.

The full new state pension will surpass the £12,570 personal allowance threshold by 2027-28, marking a historic shift where state pension income becomes subject to taxation.

Office for Budget Responsibility forecasts suggest pension increases will predominantly follow the triple lock's 2.5 per cent minimum guarantee in coming years, with earnings growth of 3.2 per cent expected to drive the April 2027 rise.

This trajectory means pensioners receiving only state pension income will face tax obligations regardless of having no additional private pension funds.

LCP's projections indicate that by 2031, as many as 10 million pensioners could find themselves within the tax system.

The freeze on tax thresholds combined with guaranteed pension increases creates an inevitable collision between rising retirement incomes and static allowances, fundamentally altering the financial landscape for Britain's elderly population.

Former pensions minister Sir Steve Webb warned that "long gone are the days when saying goodbye to work meant saying goodbye to having to worry about paying income tax," noting that nearly 250,000 additional pensioners will need to engage with HMRC annually from next year.

Steven Cameron from Aegon described the situation as "the Government giving with one hand and taking with the other," highlighting how the triple lock's protection is undermined by frozen tax thresholds.

Andrew Tully of Nucleus Financial raised concerns about payment collection, explaining that "HMRC will request payment after the end of each tax year," which could shock those dependent solely on state pensions who lack spare funds for unexpected tax bills.

The Chancellor has pledged to avoid simple assessment tax returns for affected pensioners, promising to outline alternative collection methods next year as part of modernising the tax system.