Warning as ‘millions’ to pay income tax on state pension after budget

On Thursday, the Chancellor finally gave 12.4 million pensioners some good news by passing on the triple lock increase from April. Yet there is a potential downside, too.

Hunt’s move to increase the state pension by 10.1 percent in line with September’s inflation figure is welcome relief as prices rocket. It is also a victory for the Daily Express which campaigned for Prime Minister Rishi Sunak to preserve the triple lock.

Now a new danger has emerged following Hunt’s decision to extend the freeze on income tax thresholds until 2028.

The personal allowance, which marks the point at which everyone starts paying income tax, will be fixed at £12,570 a year in that time.

This will drag more workers into the net as wages rise, in a process known as fiscal drag.

It may also hit the poorest pensioners as the state pension could soon exceed the personal allowance, making it instantly liable for income tax.

This could put pensioners in a ridiculous situation where they receive their state pension then hand a chunk of it straight back to HM Revenue & Customs.

Of course, many pensioners already pay income tax, but only if they have other sources of retirement income, such as a workplace or personal pension, or a job.

Yet soon the poorest pensioners who rely solely on the state pension could be dragged into the income tax bracket as well.

Once they start paying income tax, they are on a slippery slope.

The moment HMRC has a cohort of people in its grip it is reluctant to let them go, as we see today with the UK tax burden at an all-time high.

From April, the new state pension for those who retired from April 6, 2016, will increase to £10,600 a year.

If the triple lock remains in force and inflation this time next year is 7.4 percent as expected, the state pension would jump again to £11,384 a year from April 2024.

READ MORE: State pension to hit £10,600 but older pensioners get £2,500 less

In that time, the personal allowance will have remained fixed at £12,570, but the new state pension will edge steadily closer.

If inflation settled at around five percent after 2023, the new state pension would increase to £13,178 in 2027/28 when incredibly, the personal allowance freeze will still be in force.

Andrew Tully, technical director at Canada Life, said Hunt may have set up a tax trap for pensioners. “Implementing the triple lock will be welcome news to the millions of pensioners struggling with the current cost of living crisis

“However, there is a sting in the tail as there is potential for the state pension to exceed the frozen personal income tax threshold by 2028, potentially dragging many millions more pensioners into paying income tax.”

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While those on the new state pension are most vulnerable, those who retired before April 6, 2016, on the basic state pension may also be exposed.

Although the old state pension is much lower, may have it topped up by the state second pension (S2P) and the state earnings-related pension scheme (Serps), and will be steadily pushed into paying income tax.

Those who earn money from a work or personal pension or a part-time job are now likely to exceed the personal allowance sooner rather than later.

Currently, most state pensioners do not have to worry about income tax, because 54 percent live solely on the state pension and other benefits.

They do not have to pay National Insurance either, although that is something HM Treasury would dearly like to change.

When Chancellor, Sunak planned to impose the 1.25 percent NI levy on pensioners who earned money from a job in retirement, starting from April.

That has now been axed but it would be no surprise to see HM Treasury come back for more later.

Anything that drags the poorest pensioners into paying income tax could prove the thin edge of a very dangerous wedge.

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