Chancellor Rachel Reeves's first Budget moves are poised to push a significant number of state pensioners into the income tax system for the first time, financial experts have warned.
The central issue stems from the interaction of two key policies: the rising State Pension, protected by the Triple Lock, and the government's decision to freeze income tax thresholds for a further three years. This combination creates a 'fiscal drag' effect, where inflation and pension increases pull individuals into higher tax brackets without any real-terms increase in disposable income.
The Mechanics of the Fiscal Squeeze
While Chancellor Reeves has confirmed that retirees who rely solely on the state pension will not pay tax during this Parliament, the picture is starkly different for those with additional income. This includes millions with modest private pensions, savings interest, or part-time earnings.
George Williamson, CEO of probate lending firm Level Group, explained the double impact. "Frozen thresholds combined with rising income mean more retirees will pay income tax," he stated. He further warned that if these individuals save rather than spend, their estates could grow, thereby increasing future inheritance tax exposure.
Charity Voices 'Deep Regret' Over Policy Impact
The charity Age UK has expressed serious concern about the consequences for older people on low incomes. Caroline Abrahams, the charity director, described the extended freeze on the personal allowance as "deeply regrettable."
She emphasised that this will "drag more older people into paying income tax, including some on low and modest incomes who need all the help they can get to sustain a decent standard of living at a time when prices for essentials are constantly rising."
Abrahams stressed that the Triple Lock is now 'more important than ever' for pensioners grappling with the ongoing Cost of Living crisis, as it provides a crucial safeguard for their core income.
Long-Term Implications for Retirement Planning
The warnings highlight a growing tension in retirement policy. The Triple Lock, introduced in 2010, guarantees that the State Pension rises annually by the highest of three figures: inflation (CPI), average earnings growth, or 2.5%.
However, its success in increasing pensioner incomes is now inadvertently colliding with static tax boundaries. This scenario forces retirees with small private pots to engage more actively with HMRC and complicates long-term financial and inheritance planning.
Experts conclude that the current trajectory means a steadily increasing portion of the pensioner population will become taxpayers, altering the financial landscape for retirement in the UK.
