The Cosmic Watchdog

Millions of pensioners could be hit with unexpected tax bills as the state pension rises while income tax thresholds remain frozen. From Saturday, the state pension will increase by 4.1%, in line with the government’s triple lock pledge. The system guarantees that the state pension rises each year by the highest of wage growth, inflation, or 2.5%. This time, the increase is based on average earnings for May to July 2023.

As a result, pensioners on the full new state pension will see their annual income rise from £11,502 to £11,973, an increase of £471. Those on the full basic state pension will receive around £9,175, up from £8,814. But the rise could come at a cost. The personal allowance, the amount people can earn before paying income tax, is still frozen at £12,570 and will stay at that level until 2028. With each year’s pension increase, more retirees are being pushed closer to the tax threshold. Experts warn that if the triple lock continues, the full state pension alone could exceed the personal allowance in the near future.

Clare Moffat, pensions expert at Royal London, said: “Around 12 million pensioners will receive more in their state pension from this weekend (April 6), bringing them perilously close to the amount that can be received without incurring tax liability.

“If the triple lock continues to rise, the state pension could soon exceed the personal allowance and be taxable.”

Those who receive other sources of income, such as private or workplace pensions, rental income or part-time work, may find themselves paying income tax even sooner, The Sun reported.

Some pensioners already pay tax on their state pension, especially if they have delayed their claim or are eligible for the Additional State Pension.

This scheme applies to people who reached pension age before April 6, 2016, and includes payments such as SERPS, which were available between 1978 and 2002.

Ms Moffat added: “There are currently people who only receive the state pension and already pay tax on it.

“That’s normally because they’ve delayed taking their state pension or have larger amounts of Additional State Pension.”

The personal allowance freeze was originally introduced in 2021, and in May 2024, then-Chancellor Jeremy Hunt confirmed it would stay in place until at least 2028.

However, current Chancellor Rachel Reeves has announced that the thresholds will rise in line with inflation after that date.

In the meantime, pensioners can take steps to reduce their tax liability.

Withdrawing smaller amounts from a defined contribution pension, using ISA savings, or consulting a financial adviser could help keep income below tax limits.

Currently, the basic income tax rate of 20% applies to income between £12,571 and £50,270.

The higher rate of 40% covers earnings up to £125,140, while anything above that is taxed at 45%.

With thresholds frozen and pension incomes rising, the coming years could see more retirees drawn into the tax net.