Stealth raids mean taxman could come calling for pensioners

EVERY retiree claiming the new state pension could be hit with an income tax bill for the first time as the triple lock drives payments up in line with surging inflation.

The pension will rise to £12,544 a year in 2028, according to analysis of figures from the Office for Budget Responsibility (OBR) by Canada Life – £26 below the threshold for paying basic rate income tax. It means that if inflation slightly overshoots the OBR estimate, hundreds of thousands of pensioners will become taxpayers for the first time since they retired.

Jeremy Hunt will keep the triple-lock promise to increase the state pension by whichever is the largest of inflation, wage growth or 2 per cent. This means that the new state pension – £9,628 per annum – will rise by around 30 per cent over the next six years, the OBR said.

Meanwhile, the Chancellor is freezing personal allowances at £12,570 until 2028. If pension payments eventually exceed the personal allowance, the 20 per cent basic rate of income tax will be due on income above the threshold.

More than 12million retirees will get a record 10.1 per cent increase in their state pension next year alone, taking it to as much as £10,600 per year. The older basic state pension, paid to those who qualified for it before 2016, will increase to £8,122.

Andrew Tully, of Canada Life, said: “The frozen personal allowance and income tax thresholds are a stealth tax which will potentially drag millions more pensioners into paying income tax for the first time or paying higher rate tax when they were previously basic rate taxpayers.” He also warned that many retirees may be required to complete a self-assessment return for the first time, creating an administrative headache for them and staff at HM Revenue & Customs. The Chancellor also announced on Thursday that a review of the state pension age would be published earlier than expected next year – prompting fears that the state pension age could be increased to save the Treasury money.

Sir Steve Webb, of consultant LCP, a former pensions minister, said: “A combination of freezes in personal allowances and large increases in the state pension meant the majority of pensioners could expect to be taxpayers within a few years.

“While it is fair for better-off pensioners to pay their fair share of tax, it seems hard to justify a system where someone who has no income beyond a state pension and is potentially entitled to help with rent or council tax because they are on a low income should find themselves in the tax net.” Analysis from LCP has previously shown that half a million retirees will pay income tax as a result of next year’s triple lock boost and the extended freeze to the personal allowance.

Maintaining the manifesto pledge is expensive for the Treasury. The decision to opt for an inflation link rather than an earnings link will cost it an additional £5billion in the spring.

Phillip Hammond, a former chancellor, warned this month that the Conservatives should review their long - term commitment to the triple lock because it was “difficult to justify”. With each percentage point rise in the state pension costing the Treasury £0.9bn, Mr Tully said a “grown-up conversation” on the triple lock’s future was needed.

Helen Morrissey, of the broker Hargreaves Lansdown, said that 2028 was “a long time away and we will have had a general election and potentially a change of government by then who may have a very different view on such a lengthy income tax threshold freeze”.