The state pension is set to overtake the personal allowance limit, the point at which someone starts paying income tax, in 2027 – making all pensioners eligible for income tax
In the next few years, millions more state pensioners are likely to be pulled into paying income tax.
This could come as a shock to millions on low incomes whose only source of income is the state pension. Despite calls for the Government to prevent this by raising tax thresholds, there have been no indications of such action so far.
By 2027, the state pension is projected to surpass the personal allowance limit, which is the point at which someone begins paying income tax. Unless changes are made, all pensioners would become eligible for income tax.
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This impending clash has been facilitated by frozen tax bands, often referred to as a stealth tax, reports Birmingham Live. While the state pension has risen, the tax threshold has remained static, causing the two amounts to converge.
The full state pension rate is expected to increase to £12,535 in 2026, just below the £12,570 personal allowance, which is set to remain frozen until at least 2028.
Due to the triple lock guarantee, which ensures annual pension increases, the amount will exceed the £12,570 cut-off point in 2027.
Critics have deemed the system unfair and labelled the frozen allowance rate as a stealth tax. From next year, those with only small private pensions will also be required to pay income tax.
As the state pension approaches the personal allowance limit, pressure on the Government is likely to intensify. Martin Lewis warned: “This will take someone on the full new state pension to £12,535 a year, only £35 below the frozen personal allowance (amount you can earn tax-free each year).
“So as state pension income is taxable, that means without any question the following year (unless something changes), those on the full new state pension with no other income will for the first time pay tax on it (as it will rise a minimum 2.5% and personal allowances are frozen).”
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