Millions of retirees across Britain are set to be hit with a tax on their state pensions alone for the first time as HM Revenue and Customs (HMRC) is set to "claw back" payments, analyst warn.
State pension payments will receive a minimum boost of £561.60 to their state pension from April, based on the latest wage growth data from the Office for National Statistics (ONS).
The full new state pension will rise to £12,534.60 annually, thanks to a 4.7 per cent uplift triggered by the Government’s triple lock mechanism.
The policy guarantees pensions rise by the highest of inflation, average earnings growth, or 2.5 per cent. This year’s increase reflects wage growth of 4.7 per cent in the three months to July.
The rise marks nearly a decade since the new state pension system began.
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Kevin Mountford, co-founder of Raisin UK, an online banking service, warned: "For some it will feel like the benefit is being clawed back" as thousands more pensioners are pulled into the tax net.
When taxpayers are pulled into higher tax brackets due to frozen allowances, this is commonly referred to as fiscal drag.
Claire Trott, head of Advice at St. James's Place, a wealth managing firm, said: "It’s unlikely that average prices will increase enough to override this" when inflation figures are released next month.
Ms Trott added: "Someone with other income of £10,000 will effectively only see an increase in their take-home income of 2.25 per cent due to the additional taxation, which could result in unexpected tax bills for unassuming pensioners."
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However, analysts warn this places the state pension close to exceeding the personal allowance threshold of £12,750, likely crossing it within the next two years.
The rise marks nearly a decade since the new state pension system began, offering some relief to pensioners facing persistent cost-of-living pressures.
However, analysts warn the new pension will reach more than 99 per cent of the personal allowance, which remains frozen at £12,570 until 2028.
This leaves retirees with just £35.40 of extra income before they must start paying income tax. Any part-time wages, private pensions, or investment income will immediately tip them over the line.
It marks a dramatic shift from 2021-22, when the new state pension represented just 74 per cent of the personal allowance.
Experts say the combination of frozen thresholds and rising pension payments has created a stealth tax trap for older Britons. The £561.60 uplift will shrink to around £337 after deductions.
Mr Mountford stressed: "It is essential for people to plan ahead, be aware of how tax thresholds affect them."
The freeze on personal allowances has already eroded retirees’ tax-free income. Before 2020, the allowance steadily rose, climbing from 23.61 per cent of average earnings in 2007-08 to almost 45 per cent.
It marks a dramatic shift from 2021-22, when the new state pension represented just 74 per cent of the personal allowance.
| GETTYWhile the policy gives pensioners significant protection, critics warn persistent inflation combined with frozen thresholds is likely to reverse the trend.
More of each year’s pension increase is being swallowed by tax, leaving retirees with less real value despite the triple lock.
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State pensioners are set to see a further tightening on finances | GETTY The freeze, now extended until 2028, guarantees this squeeze will continue. Experts warn that the long-term financial landscape for older people has been fundamentally altered.
The triple lock’s future also remains uncertain. Policymakers face tough choices over how to fund the scheme as life expectancy rises and fiscal pressures grow.
Options such as removing the triple lock, raising the state pension age more quickly, or means-testing access have all been floated.
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