The majority of pensioners could be paying income tax on their state pension within the next three years, experts have warned. Prior to Rachel Reeves’ budget, experts were concerned she might extend the income tax threshold freeze beyond the 2028 end point set by the Conservative government.

This effectively creates a stealth retirement tax as the rising state pension will eventually exceed the tax-free threshold of £12,570. Although the Chancellor confirmed her intention to stick to this deadline, new forecasts suggest that retirees probably have less than three years until the retirement tax takes effect regardless.

The Office for Budget Responsibility has published estimates for the annual state pension increases over the next five years. According to these projections, the full new state pension will exceed the tax free threshold by April 2027 at an annual rate of £12,592.

By 2029, the OBR expects the state pension to reach £13,230, which would make retirees liable for an income tax bill of over £100 a year if this is their only income.

The forecast is also relatively conservative in its expectations for how much the state pension will rise each year. The triple lock mechanism boosts the state pension rates every April based on the highest of three figures: average earnings growth, inflation or 2.5%.

This means the annual increases can vary greatly, as the rate was raised by 8.5% in 2024 in line with wage increases. Next April will see a 4.1% increase.

The OBR forecast used the minimum growth rate of 2.5% from April 2026 to April 2029, flagging the possibility of numerous retirees facing income tax bills before the 2027 estimate. Consultancy LCP highlights that currently 2.5 million pensioners are already dealing with this ‘retirement tax’.

Income tax considers several income types, such as private or workplace pensions and rental earnings, pushing some past the £12,570 threshold right from the start of their retirement.

But there’s concern that freezes, along with rising pension rates, may hit vulnerable seniors with taxes.

Bestinvest by Evelyn Partners’ personal finance analyst Alice Haine spoke out on the issue to MoneyWeek, expressing that it would be particularly unfair for those solely dependent on a pension: “Landing retirees with no other sources of income with tax demands will be unfair and extremely worrying for pensioners who are already struggling to get by after the cost-of-living crisis.”