The UK state pension is on the verge of triggering a 'stealth tax' for millions of retirees as the government's income tax threshold remains frozen while pension payouts are set to increase. Next April, the full new state pension is projected to exceed the £12,570 threshold at which individuals begin paying income tax. This threshold has been fixed until at least 2030.
The state pension is currently £12,548 per year, a figure that is £22 below the income tax threshold. However, the government's commitment to the triple lock, which guarantees that the state pension rises each year by the highest of inflation, average earnings growth, or 2.5%, is expected to push the pension payout over the tax-free allowance.
While the government has indicated plans to address this issue, experts suggest that the proposed solutions will be insufficient. These measures are anticipated to provide relief to only a small fraction of pensioners, with estimates suggesting that only one in 18 retirees will benefit from the planned adjustments. This situation has been described as a 'flawed' quick fix that fails to address the broader impact of the frozen tax threshold on a significant number of pensioners.