Millions of state pensioners issued HMRC warning

More state pensioners could be at risk of having their payments taxed next year due to frozen thresholds and the triple lock pledge. Under the “triple lock” guarantee, the state pension rises each April in line with the highest of three measures: average earnings growth between May and July, CPI inflation in September, or 2.5%.

If the state pension rises by an estimated 5.6%, it’ll pass the personal allowance threshold, deeming it liable to be taxed. Mike Ambery, retirement savings director at Standard Life, part of Phoenix Group, said: “With inflation forecast to rise to around 3.7% this year, and wage growth including bonuses currently sitting at 5.6%, it looks likely that earnings will determine next year's triple lock and it's possible that we'll see next year's state pension rise above the £12,570 personal allowance.”

At present, the full new state pension is worth £11,973 per year, which is just £600 less than the tax-free personal allowance. Around 4.38 million people are estimated to be claiming the new state pension.

A 5.9% increase would add around £706 to payments, exceeding the allowance by around £109.

Currently, income tax thresholds are frozen as they are until 2028. The latest Office of Budget Responsibility (OBR) estimates the move will raise over £38billion a year in 2029/30.

Mr Ambery continued: “There are a few options on the table – the Government could lay out a plan to lift the personal allowance freeze for everyone, which would generate consistency between workers and pensioners but come at a cost to the public purse.

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“They could also consider bringing in a mechanism by which the personal allowance increases for pensioners alone, similar to the previous Government's 'triple lock plus' plan – this would be less costly, but raise questions of bias over workers.

“The reality is, any inflation-busting state pension increase next year is likely to raise questions on taxation and the long-term affordability of the policy.”

The increase won’t just impact the state pension, another expert has warned. It could impact other benefit entitlements too.

Rebecca Lamb, external relations manager at Money Wellness, said: "Many people understandably assume that a small rise in their pension is a good thing. But if it pushes them just over the personal tax allowance, it won't just mean paying a bit of income tax - it could disqualify them from Pension Credit, which in turn opens the door to a much larger loss.”

Pension Credit acts as a gateway to a wide range of help: Housing Benefit, Council Tax Reduction, free NHS dental and eye care, the Warm Home Discount, Cold Weather Payments, and even free TV licences for over 75s. The benefit alone is currently worth an average of £4,200 a year.

But in total, Ms Lamb warned: “Someone could end up losing more than £8,000 a year in support, all because their pension creeps just above the threshold.”

She added: “What's most worrying is that many won't see it coming.”

Several petitions have been launched to raise the income tax threshold for pensioners, as well as one to raise the threshold more widely to £20,000.

Alan David Frost, who launched the latter petition, argued: “We think it is abhorrent to tax pensioners on their state pension when it is over the personal allowance. We also think raising the personal allowance would lift many low earners out of benefits and inject more cash into the economy, creating growth.”

The petition has gained more than 247,000 signatures and will be debated in parliament on May 12, 2025.