State pension income tax shock – triple-lock hikes could push millions into HMRC trap | Personal finance | Finance

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This will bring the new state pension to around £10,600, rare good news for pensioners as the cost of living soars. It may not be the last big increase either, with inflation set to stay high for years.

Sunak’s decision to freeze income tax thresholds for five years will bring tens of billions to the Treasury.

As incomes rise, millions of people will either start paying taxes for the first time or find themselves pushed into a higher tax bracket. This process is called the tax brake and is a sneaky way to raise taxes without openly admitting it.

Workers are not the only ones caught off guard. It will soon be the turn of retirees. Those who have occupational or personal pension income in addition to the state pension already pay part of their income to HM Revenue & Customs as income tax.

As the state pension increases but the personal allowance remains fixed, they will pay even more to HMRC. Soon, even those surviving on state pensions alone may suddenly find themselves paying income tax at the basic rate as well.

READ MORE: “Believe it when I see it!” Pensioners slam triple-lock bumper promise

Under the triple lockdown, the state pension either increases with earnings or inflation, or by 2.5%, whichever is higher. Next year the inflation figure is certain to apply, with the Bank of England forecasting consumer price growth to reach 11% in October.

For triple-locking purposes, the September figure applies, and this could easily exceed 10%, pushing the new state pension to around £10,600 a year in the tax year 2023/24.

Now suppose that inflation stays at 7% for the next three years and that the government applies the triple lock each time. In 2024/25 the State Pension will increase to £11,342, then to £12,135 in 2025/26 and to £12,985 in 2026/27. This will exceed the personal allowance of £12,570, at which point income tax will kick in.

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Now, 2026/27 is the year Sunak’s personal allowance freeze ends. So he could get around that by raising the base rate tax threshold above whatever the state pension pays. Or he could suspend the triple lock for the second time. Either way, the freeze will still leave millions more pensioners dangerously close to the base rate tax threshold.

Any income they earn over that amount could instantly incur a 20% basic tax. Just like income from a job. It’s part of a wider trend that will drive more pensioners into the clutches of HMRC. From April next year, they will pay National Insurance for the first time, on any income from employment.

It will start at 1.25%, but as I predicted before, this rate is likely to increase over time. It is the thin end of a very long wedge.

It is undoubtedly good news that the triple lock of the state pension will do its job and maintain the real value of pensioners’ incomes. Yet thanks to Sunak’s tightening of the personal allowance threshold, it will also push more retirees to pay income tax.

This is not the first time that the Treasury has given with one hand and taken with the other.


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