Millions of pensioners could be hit with a £100 'retirement stealth tax' on their state pension from next spring.
Unless the full state pension is your only income, or you are living on less than that anyway, you will see some of it clawed back by the taxman.
That is because the full-rate state pension is on course to top £13,000 a year, busting the basic-rate income tax threshold of £12,570 a year.
While the bump in income is welcome, news that the taxman is going to take a chunk of it straight back again will infuriate many pensioners.
Older Money Mail readers have in the past told us in no uncertain terms that they don't believe any tax should be levied on a state pension which they earned by stumping up National Insurance contributions throughout their working lives.
The Government is alive to the widespread discontent and has promised to lift those whose sole income is the full state pension 'without any increments' out of income tax.
But the vast majority of pensioners won't qualify for this waiver – and leading pension experts warn that the Government's 'grossly unfair' solution will lumber retirees with a two-tier tax system.
Here, we explain the looming state pension stealth tax trap, how much you can expect to lose, whom exactly the Government plans to let off a tax bill – and whom it won't.
In April next year the headline state pension is expected to rise from the current £241.30 a week to £251.20 a week, amounting to a £500-a-year increase
In April next year the headline state pension is expected to rise from the current £241.30 a week to £251.20 a week, amounting to a £500-a-year increase.
This is thanks to the triple-lock pledge that promises to raise the state pension by the highest of three figures – inflation, average wage growth or 2.5 per cent.
If the state pension increases as expected, worked out as a 52-week annual income, it will be £13,062 from April 2027. This is more than the £12,570 tax-free personal allowance, which has been frozen since 2021.
Taxing the headline state pension after it breaches the personal allowance next spring represents a step-change. And it is a step-change that's not likely to be corrected any time soon.
This is because the initial freeze on every tax bracket, which was originally due to run to 2026, was extended to 2028 by Jeremy Hunt as chancellor, then until 2031 by Rachel Reeves when she was chancellor in her November 2025 budget.
Meanwhile, the state pension triple lock has been guaranteed until at least the next election.
