Rachel Reeves could clobber thousands of pensioners with stealth tax raid in 2027

Millions of older people could be dragged into paying tax on their state pension for the first time in 2027, experts have warned. Former pension ministers have told how people could be hit by Chancellor Rachel Reeves's stealth tax raid in less than two years.

This is because the state pension is likely to increase by about 4.7% in April 2026, taking the new state pension to £12,535 a year - less than a pound a week short of the income tax threshold of £12,570. With the triple lock formula guaranteeing an increase of at least 2.5% the following year, the headline rate of the new state pension is certain to exceed the current tax threshold by 2027. Former pensions minister Sir Steve Webb, a partner at consultants Lane Clark and Peacock, said: "The standard rate of the new state pension is creeping ever closer to the frozen personal tax allowance.

"Indeed, we know for certain that someone who has no other income aside from the new state pension will be a taxpayer come April 2027.

"It is already the case that nearly three quarters of all pensioners pay income tax, and the ongoing freeze in tax thresholds coupled with steady rises in the pension will drag more and more into the tax net."

People on the new full state pension are set for a rise of over £500 a year from next April, following the latest official earnings data.

Under the triple lock guarantee, the state pension increases every April in line with whichever is the highest of total earnings growth in the year from May to July of the previous year, CPI (Consumer Prices Index) inflation in September of the previous year, or 2.5%.

The Office for National Statistics showed a rise in total wage growth including bonuses to 4.7% in the quarter to July, up from 4.6% in the three months to June.

While the final piece of the puzzle will not come until inflation figures for September are published in October, it is thought unlikely that the rate of the CPI will be higher than 4.7%.

Inflation currently stands at 3.8%, with the latest data for August due to be released on Wednesday.

Experts said this means the wage rise will be used to calculate the figure for the yearly increase, putting pensioners on track for a 4.7% uplift in the state pension next year.

Hargreaves Lansdown said that based on a rise of 4.7%, this would mean a full new state pension increases from its current level of £230.25 a week to £241.05 per week from April.

Those retiring on the basic state pension would see their weekly income increase from £176.45 per week to £184.75.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, warned the increase in the state pension would put many pensioners close to the threshold for paying income tax.

She said: "If they receive the 4.7% uplift, it takes their annual state pension to around £12,535 per year, which leaves them just a whisker under the threshold of paying basic rate tax."

Dennis Reed, the director of over-60s campaign group Silver Voices, said his top priority ahead of Ms Reeves's November Budget is to stop the "old age tax trap plunging thousands more pensioners into poverty".

He added: "We will be flooding MPs' inboxes with calls for the Chancellor to raise the lower tax threshold to stop the absurdity of the basic state pension being taxed possibly as early as next April.

"The whole state pension and triple lock system is being inexorably undermined by the continuing freeze. It would add insult to injury if the Chancellor makes things worse by extending the freeze as has been mooted! "

Meanwhile, former pensions minister Baroness Ros Altmann warned the issue could become "politically toxic".

She added: "It feels like giving with one hand and taking with the other, and the amounts of tax owed will be tiny. So small, in fact, that the cost of trying to collect the tax will be much higher than the tax paid, so a net loss to taxpayers.

"The other big problem is that people who have just under the full state pension amount and claim pension credit that tops their income up to a higher level and also provides them with thousands of pounds of additional benefits, such as for housing, council tax, cheaper fuel and so on, will not be taxed at all.

"So those who are on means-testing could be much better off than those with a full state pension."

Work and Pensions Secretary Pat McFadden confirmed on Tuesday that the Government's election manifesto promise on the pensions triple lock would be honoured.

He said: "This Labour Government is committed to maintaining the triple Lock for the course of this Parliament.

"It is estimated that will mean a rise in the state pension of around £1,900 a year by the end of the Parliament.

"That's a commitment from the Labour Government to the UK's pensioners."

Mr McFadden made the comments as figures released on Tuesday showed the number of people who received winter fuel payments plunged to 1.3million following cuts by the Labour Government.

In previous years, about 11million people in England, Wales and Scotland received the payment, which helps pensioners cover winter energy bills.

But a Treasury decision to means-test the payment led to the much lower number of recipients last year, new official figures from the Department for Work and Pensions (DWP) show.

That policy has now been scrapped, with a U-turn by the Chancellor in June meaning that the vast majority of pensioners will again get the payment - worth up to about £300 per household - this coming winter.

Helen Whately, Shadow Work and Pensions Secretary, said: "Today's figures expose Labour priorities - while they were willing to rip vital support from millions of pensioners, they have failed to deliver the meaningful welfare reform our country needs.

"While we welcome the eventual U-turn after Conservative campaigning, the damage has already been done, and millions of pensioners had already experienced a nightmare winter last year."

"The Prime Minister must come to his senses and accept Kemi Badenoch's offer to work with us to reform disability benefits, put the country's finances back on a sustainable footing and fill the black hole they've created, rather than leaving older people to pay the price for their chaos."

A Government spokesman said: "We are committed to helping our pensioners live their lives with dignity and respect, which is why millions will see their pension rise by up to £1,900 this parliament."

"Pensioners whose sole income is the full new State Pension or basic State Pension without any increments do not pay any income tax this year. The Chancellor keeps all taxes under review and makes tax policy decisions at fiscal events."

An increase of over £560 per year in the rate of the new state pension next April could sound like a bit of a windfall. But the reality will be very different.
Although an increase of 4.7% - in line with the growth in the average wage - is welcome, much of this will be eaten up by rising prices. The Bank of England expects inflation to hit 4% this Autumn, which means that more than £470 out of the £560 rise will simply be needed to meet increases in the cost of living.
On top of this, income tax is another sting in the tail. At the moment, nearly three in four pensioners has to pay income tax and that number grows every year as the income tax threshold remains frozen. For most pensioners, at least 20% of the £560 rise - or over £100 - will go back to the Government in income tax.
This means that a combination of rising prices and a rising tax burden will mean millions of pensioners may feel no better off next year than this.
The freezing of the tax threshold also means that more pensioners will have to start paying tax in retirement for the first time.
If they have a state pension and a company pension, the Government will use the 'tax code' on the company pension to collect any tax due.
But if they only have a state pension, the Government will need to collect tax some other way.
The normal process is that HMRC will look at the end of the tax year at your total income and work out how much tax you should have paid. If no tax has been collected then you will be issued with a 'simple assessment' tax demand after the end of the tax year.
Whilst this mostly means it won't be necessary to file a tax return, it does mean getting an unwelcome letter each year from the tax office. It also means having to set aside some money each year to cover the tax bill that will eventually land on the doormat.
No doubt there will be stories about how well pensioners are doing and about how 'generous' the triple lock rule is for state pensioners. But you don't have to look far below the surface to see that for many pensioners, money will remain very tight.