Britain’s retirees are about to receive a pay rise that looks more generous on paper than it will in practice. From April the state pension will increase by 4.7%, bringing the full annual payout to £12,534.60.
That may sound like good news. Yet the uplift brings the pension to within £35 of the frozen personal income-tax allowance of £12,570. The proximity of the two figures means hundreds of thousands of pensioners, many of whom have never before dealt with the taxman, will soon find themselves in HMRC’s net.
So what’s gone wrong?
The awkward clash is the result of two opposing policies. One is the “triple lock”, a political pledge to raise pensions each year by whichever is highest of inflation, average wage growth or 2.5%. The other is the government’s decision to freeze income-tax thresholds until at least 2028.
On their own, both policies have defensible logic: the first provides older people with some protection against rising living costs; the second provides a steady boost to the Exchequer without requiring noisy rate rises. Combined, they risk making every pound of additional income — from a private pension, savings interest or even certain benefits — taxable.
The arithmetic is simple. If thresholds stay where they are, within a few years the state pension alone will exceed the allowance. That would mean any extra income at all triggers a tax liability. Already the number of pensioners paying income tax is climbing: HMRC data suggest 8.5m now do so, up from 7.8m a year earlier. The Institute for Fiscal Studies expects the total to swell by hundreds of thousands more within two years.
- Could a cut in Cash ISA allowances boost UK stock market investing?
- Four scenarios for the UK’s autumn budget
- Rachel Reeves’ surprise speech: Should investors be worried?
Critics call this a stealth tax. By holding thresholds still while benefits and wages rise, the Treasury rakes in revenue through “fiscal drag”. Retirees are especially vulnerable because their incomes are often fixed and modest. What looks like a 4.7% uplift risks being shaved down sharply once tax is applied. For higher-rate taxpayers the £560 annual gain from April’s rise could shrink to about £330.
Responsible planning is being punished
For the government, the temptation is obvious. Freezing allowances is a politically quieter way to raise money than headline-grabbing tax hikes. Pensioners, however, are beginning to notice. Nigel Green of deVere Group, a financial advisory firm, argues that the freeze undermines confidence in retirement planning. “It punishes those who planned responsibly,” he says. In his view, either the personal allowance should be lifted in line with the state pension or ministers should rethink the triple lock itself.
That second option would be politically treacherous. The triple lock has become a totem of intergenerational fairness — or unfairness, depending on perspective. Abandoning it would risk alienating a core voting bloc. Yet allowing the pension to overtake the allowance produces its own absurdity: the state paying out with one hand and taxing back with the other.
Use your tax free savings
In the meantime financial advisers are urging pensioners to prepare. That means making greater use of tax-free savings vehicles such as ISAs, timing pension withdrawals more carefully and reviewing investment portfolios before the new tax year. Waiting until HMRC issues a bill is too late.
What should be a welcome boost for older Britons risks becoming a source of resentment. Without reform, the government’s promise to shield pensioners from inflation may end up draining their pockets instead.
