MILLIONS FACE PAYING SOME OF THEIR STATE PENSION STRAIGHT BACK TO HMRC

Millions of retirees face paying some of their state pension straight back to HMRC in a 'bizarre tax cliff edge' for older people, an analysis has revealed.

Latest forecasts from the Office for Budget Responsibility (OBR) showed how the state pension is set to rise by 4.6 per cent next April.

This would take the full new state pension to £12,569.85 per year - leaving it just 15p short of the personal allowance, after which you start paying income tax.

The OBR estimated the state pension would then rise by another 2.5 per cent in April 2027, which would take the full new state pension to £12,885.50 per year.

This would see retirees on the full new state pension exceed the income tax threshold by £315.50.

And it would mean they would immediately have to pay back £63 to HMRC based solely on their state pension income, at an income tax rate of 20 per cent.

It follows Chancellor Rachel Reeves' decision to keep a freeze on income tax thresholds until 2028 - leaving the personal allowance at £12,570 for years to come.

Jon Greer, head of retirement policy at wealth management firm Quilter, said: 'The OBR's latest forecasts confirm we are fast approaching a bizarre tax cliff edge for pensioners.'

Just under 4.4million people were new state pension claimants in 2024/25, according to Department for Work and Pensions figures.

The OBR forecast a 4.6 per cent rise in the state pension next April under the terms of the 'triple lock'.

This ensures the state pension rises each April in line with whichever is highest out of average earnings growth, inflation or 2.5 per cent.

The OBR forecast that earnings growth of 4.6 per cent in September will mean the state pension increases by the same amount next April.

Mr Greer added: 'That leaves the UK potentially only one year away from pensioners having to effectively hand a portion of their state pension back to the Exchequer in tax, which to many would seem perverse.

'What was intended as a mechanism to protect pensioners from poverty is now colliding with fiscal drag.

'This situation is the result of the triple lock producing some significant increases in the state pension due to high inflation and earning figures while the Government has failed to uprate tax thresholds in tandem.

'It also adds to the debate of what looks like the inevitable review of triple lock.'

Mr Greer suggested the Chancellor could look to avoid the tax cliff edge facing pensioners at her fiscal event in the Autumn.

Sir Steve Webb, the former pensions minister, estimated the number of pensioners paying tax will rise from around 8.5m this year to around 9.2m by 2026.

The ex-Liberal Democrat MP, who now works at consultancy LCP, told the Telegraph: 'The continued freeze on tax-free allowances, coupled with earnings-linked increases to the state pension, means that more and more pensioners are set to pay tax in the coming years.

'We could easily see another 700,000 pensioners who do not currently pay income tax dragged into the tax net over the next two years.'

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2025-03-27T11:34:32Z