Hundreds of thousands of state pensioners who retired before April 2016 are in line for a significant financial boost from the Department for Work and Pensions (DWP), but face a looming tax threat in the coming years.
The Triple Lock Boost and Annual Increase
From April 2025, the full rate of the Old State Pension, for those who reached pension age before 2016, will rise from £176.45 to £184.90 per week. This increase, driven by the government's 'triple lock' policy, translates to an annual income of £9,614.80 – a helpful uplift for household budgets. The triple lock ensures the state pension rises by the highest of average earnings growth, inflation, or 2.5%.
The Looming Threat of Pensioner Taxation
While the rise is welcome news, financial experts are sounding the alarm about a consequential 'stealth tax' that will affect pensioners on both the old and new state pensions. The core issue is the government's decision to freeze the personal income tax allowance at £12,570 until 2028.
Lucie Spencer, a financial planning partner at wealth management firm Evelyn Partners, explains the impact: "The personal allowance freeze does mean more state pensions will be taxed and that will accelerate in 2027/2028 and subsequent years."
This freeze means that as the state pension increases annually, more retirees will see their total income exceed the tax-free threshold. Crucially, experts now predict that those receiving the new full state pension will start becoming liable for income tax from 2027 onwards.
Political and Expert Reaction
The situation has drawn sharp political criticism. The Liberal Democrats have called on Chancellor Rachel Reeves not to use lower inflation as a justification for this 'stealth tax'.
The party's treasury spokesperson, Daisy Cooper, said last month: "Hitting people with a stealth tax at next week’s Budget would prolong the pain of higher taxes for much longer and unfairly pull poorer pensioners and low-income workers into paying tax for the first time."
Financial commentator Kevin Mountford, founder of Raisin UK, highlighted the particular squeeze on savers: "Freezing the personal savings allowance for yet another year might sound like a small technical decision, but for pensioners, it’s anything but. Unlike working households, pensioners can’t pick up extra hours or ask for a pay rise."
The process is expected to drag many pensioners into the self-assessment tax system, though officials have indicated plans to simplify the procedure for those affected.
