Due to the triple lock, the full new state pension increased 4.8% this month to £12,548 annually
Millions of pensioners could soon be confronting a new stealth tax, it is feared. It comes as the state pension approaches – and is poised to exceed – the income tax threshold.
Retirees have long been given assurances that those depending entirely on the state pension would avoid paying income tax. However, it is unclear what will happen in the long term. Due to the triple lock, the full new state pension increased 4.8% this month to £12,548 annually – just £22 short of the frozen personal allowance of £12,570.
The triple lock is a Government guarantee that the UK state pension will rise each year by the highest of three measures:
- Inflation (CPI) – based on the previous September
- Average earnings growth – measured between May and July
- 2.5% minimum increase
It was launched in April 2011 to ensure the state pension remains in step with living costs and rising wages. Yet a growing number of politicians and economists from across the political divide contend it is becoming financially unsustainable.
The Office for Budget Responsibility forecasts the triple lock will cost £15.5 billion annually by 2029–30. And that is intensifying debate about its long-term viability.
Chancellor Rachel Reeves has maintained the triple lock until at 2029. Consequently, the next increase in April 2027 is set to lift the pension beyond the tax-free threshold – although the government says people relying just on the state pension will not be taxed.
£1,300 windfall – but there’s a catch
The rises have been substantial since the triple lock was brought in. Research by investment firm Vanguard reveals pensioners are approximately £1,280 annually better off compared to if the state pension had merely increased with inflation.
Without the triple lock, it would stand at roughly £11,268 today. However, the policy is now clashing with frozen tax thresholds – pulling more retired people into the tax system through what’s known as fiscal drag.
The number of taxpayers aged over 66 has already surged from 6.7 million to 8.8 million in just four years according to research by Vanguard. Ministers, including the Chancellor, have repeatedly emphasised that tax is calculated on total income, and that people only pay if they surpass the personal allowance.
This has supported a longstanding expectation that pensioners relying solely on the state pension would avoid tax. Rachel Reeves told Martin Lewis last year: “If you just have a State Pension, you don’t have any other pension, we are not going to make you fill in a tax return.” She said that rule would be in place for the remainder of this Parliament, which could mean 2029 unless a General Election is held sooner.
Critical threshold approaching
The figures now demonstrate how close the system is to a crucial turning point:
- State pension: £12,548
- Personal allowance: £12,570
- Gap: just 0.2%
For the millions with even modest additional income above a state pension – such as a small private pension – the effect will be instant, with 20% tax applied above the threshold. James Norton from Vanguard described the triple lock’s effect as positive for pensioners “because the state pension is key to most people’s plans and will mean much of their basic expenditure will be covered with this guaranteed income.”
However, he cautioned: “For those with other sources of retirement income, a considered approach to tax and retirement is needed to make sure you keep as much of your hard-earned savings as possible.”
An HM Treasury spokesperson said: “Anyone whose only income is the full new or basic State Pension without any increments will not pay income tax and we are committed to that over this Parliament.
“By keeping the Triple Lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from the highest Personal Allowance in the G7.”
