State pensioners face income tax ‘nightmare’ if they earn just £413 next year | Personal Finance | Finance

It means hundreds of thousands of pensioners will suddenly find themselves paying income tax for the first time, following the Labour Party’s decision to maintain the freeze on the £12,570 personal allowance until 2027/28.

Many of them will never have paid tax in retirement, and won’t understand what’s going on, especially the elderly and vulnerable.

Soon they could have HMRC on their case, chasing unpaid tax.

Things could get really messy in April 2026, when the new state pension, paid to these who retired from April 6, 2016, looks set to exceed the personal allowance.

Labour MP Keir Starmer and chancellor Rachel Reeves know the problem is looming, but seem to be sticking their heads in the sand.

The Labour Party has pledged to maintain the triple lock for the course of the next Parliament.

This means the state pension will rise each year by earnings, inflation or 2.5 percent, whichever is highest.

Next year, it is likely to rise in line with wages, which jumped 5.7 percent between March and May, official figures show.

The triple lock earnings figure is based on average wage growth between May and July each year. With inflation now just two percent, this is likely to determine the increase.

Today’s full new state pension is worth £11,502. If it does increase by 5.7 percent next April, that will give pensioners a £656 pay rise.

It will lift the full new state pension to £12,157.

That means pensioners who get the maximum amount will only have to earn another £413 a year from any source, such as a personal or private pension or a job, to pay what has been dubbed Labour’s “retiremen tax”.

Many will have to fill in a tax return for the first time in their lives. There are penalties for failing to do so.

Higher pensions are good news for retirees but come with a sting in the tail, warned Stephen Lowe, group communications director at retirement specialist Just Group. “Freezing the personal allowance is getting people seriously worried.”

Today, around nine million out of 12.5 million state pensioners pay income tax, up from less than five million in 2010.

Lowe said that still leaves a “significant minority” who have never had to worry about paying income tax.

Until now.

Many will be in for a shock. “Those affected will often be those of greatest age and not used to dealing with the vagaries of the tax system or using online services to manage their tax accounts.”

Lowe added: “Freezing the personal allowance creates the nightmare scenario where someone not expecting to pay income tax suddenly finds out they should have paid it. That puts them in the sights of HMRC which will want its missing tax.”

Unfortunately, the mechanisms for collecting tax are not an exact science. “Our tax codes are often based on estimated information which can leave people paying too much or too little,” Lowe said.

While unpaid tax from one year can often be collected the following financial year without penalty, this is not always the case, Lowe said. “In other cases penalties and demands can be immediate.”

The problem will get even worse in 2026, unless Labour changes course.

The new state pension will only need to increase by more than 3.4 percent from 2026 to bust through the personal allowance.

At that point, anyone who gets the full amount will instantly pay income tax on it.

The Department for Work and Pensions will give with one hand, then HM Revenue & Customs will take with the other.

The bureaucracy and hassle is going to be huge.

During the election campaign, former PM Rishi Sunak said he would get round this by increasing pensioners’ personal allowance every year, in line with the triple lock.

Labour refused to match this pledge. Now state pensioners will pay the price.

Older pensioners on the basic state pension may also get hit. While the basic state headline rate is much lower than the new state pension at £8,813, many get much more because they receive additional state pension on top.

Some are already paying income tax on their state pension. Their numbers will steadily grow and Labour seems unlikely to do anything about it.

Looking to escape Labour’s income tax raid – see how pensioners can increase their personal allowance to £23,426.