A former Government minister is sounding the alarm over a potential tax raid on state pensions in the near future, which is likely to happen thanks to the impact of fiscal drag.
Millions of pensioners relying solely on the state pension face an unprecedented tax burden as early as next year, with frozen personal allowances creating a fiscal trap for Britain’s elderly population.
The personal allowance remains fixed at £12,570 until at least 2028, whilst the state pension, currently paying up to £11,973 annually to 12.9 million recipients over 66, is set to breach this threshold.
With average earnings growing at 5.2 per cent, the triple-lock mechanism will push next year’s state pension above the income tax threshold for the first time in over a century. This means pensioners with no additional income will pay 20 per cent tax on amounts exceeding the allowance.
Pensioners could be hit by a stealth tax raid
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Former pensions minister Baroness Altmann warned of serious administrative challenges ahead, stating: “Many elderly people have never done a tax return or paid tax themselves.
“They will not know what to do and may struggle to get through to the helplines, which could be overwhelmed.”
She described the situation as “a serious potential administrative nightmare for many elderly pensioners, and also for HM Revenue & Customs (HMRC)”.
The number of pensioners paying tax on retirement income has surged from 1.85 million a decade ago to almost nine million this year, according to the tax authority’s figures.
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The stealth tax raid, initiated under the previous Conservative Government, has generated significantly more revenue than anticipated through the six-year freeze on personal allowances.
Chancellor Rachel Reeves is considering extending this freeze to address an estimated £30billion shortfall in public finances.
According to the Institute for Fiscal Studies (IFS), maintaining existing personal allowance bands for an additional two years could generate up to £10billion annually by 2030.
This represents one of the Chancellor’s most substantial revenue-raising options whilst adhering to Labour’s manifesto pledges against increasing income tax, employee national insurance contributions, VAT or corporation tax.
Despite widespread concerns about inadequate retirement savings, with the IFS finding half of middle and high earners face significant drops in living standards post-retirement, the Treasury may target pension pots to balance the books.
Following the government’s welfare reform U-turn, which abandoned £5billion in planned savings, several options are reportedly under consideration.
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These include reducing the tax-free lump sum withdrawal limit from £268,000 to £100,000, potentially saving £2billion annually.
The Chancellor might also standardise pension tax relief at 30 per cent or reinstate the £1,073,000 lifetime allowance limit, though this risks renewed conflict with NHS doctors who previously threatened resignations over such caps.
Last week, Reeves refused to rule out tax rises to pay for the Government’s benefits bill concessions, saying: “I’m not going to, because it would be irresponsible for a chancellor to do that. We took the decisions last year to draw a line under unfunded commitments and economic mismanagement.
“So we’ll never have to do something like that again. But there are costs to what happened.”