One million retirees are at risk of facing an unprecedented tax bill in just months unless Government ministers take action.
Brits who rely on the state pension as their sole source of income are set to be drawn into paying a stealth tax under current rules.
Presently, everyone in the UK is entitled to earn £12,570 a year without making payments to HMRC thanks to the tax-free personal allowance.
The threshold for the personal allowance has been frozen for the past five years, with an increasing number of people drawn into paying tax since then.
The freeze means that under the state pension triple lock – which requires state pension payments to increase each April by the highest out of inflation, average earnings, and 2.5 per cent – next year some retirees are set to be paid more than the tax-free allowance.
Currently, anyone entitled to receive the full new state pension receives £241.30 per week. Over the course of a year, the payments translate to £12,548 – just £22 shy of the tax threshold.
Wage growth currently sits at 4 per cent and is likely to be the measure within the triple lock used to determine how much the state pension should increase by.
For 2027, the payment uplift would equate to £515 for those on the new state pension, taking all those in receipt of the money well above the tax-free allowance.
Last year, the then-Chancellor Rachel Reeves promised retirees who only receive income via the state pension would not be drawn into paying income tax.
However, nearly a year later, no legislation has been passed to enforce the pledge made by the Government.
Ed Monk from pension investment company Fidelity International warned that with just months until the new tax year “time is running out” for the Government to introduce a solution.
Part of the problem facing ministers is how to make the system fair so that those with a minimal private pension do not end up being worse off for having saved for their retirement.
Monk said: “If the Government decides not to collect this tax it risks creating a two-tier system: many pensioners can be taxed on their state pension perfectly well because they have private pension income and a tax code.
“Would it be fair to deny them a waiver for paying tax on their state pension? Bear in mind that they need only a very small private pension to be taxed this way, so they may not be much better off than others who get only the Government payment.”
John Healey, who replaced Reeves as Chancellor in July, has not spoken publicly about the pledge to protect those only in receipt of the state pension.
