The research shows that by 2026 million pensioners could suffer from so-called “retirement tax” on their state pension.
Labour will hold the current tax threshold at £12,570 up to 2027-28. Nevertheless, in April 2026 projected wage growth may push state pension from the current £11,502.40 to the personal allowance limit, thereby making several million pensioners taxable for the first time.
During their campaign for the general election, Conservatives argued that Labour’s policies would lead to a “retirement tax.”
Basic State Pensioners Will Soon Pay Income Tax
Income thresholds including personal allowance were frozen by Conservative government on income tax until 2027-28. Over their 14 years in office, this policy progressively hauled another two and a half million individuals of retirement age into the taxable income bracket.
Labour did not match such offer made by conservatives as “triple lock plus” implying exemption of tax on state pension. Pledging itself to sustaining freeze on threshold and preserving triple lock, however, this was short of Labour’s claim.
This means that every year state pensions must be raised either by inflation or average earnings growth or by a minimum of 2.5%.
Current Economic Indicators and Future Projections
Recent data from the Office of National Statistics indicated a 5.7% increase in average wages between March and May. Given that inflation stands at 2%, wage growth is anticipated to be the dominant factor influencing the pension rise this year.
A 5.7% wage increase would elevate the state pension to £12,158 by April 2025. The Bank of England projects a 2.75% average earnings growth for the following year, pushing the state pension to £12,492 by April 2026, just £78 short of the personal allowance threshold.
Mel Stride, the shadow pensions’ secretary, said: “Keir Starmer wants you to believe that Labour has changed, but hiking taxes is in their DNA.
“Labour’s refusal to increase income tax thresholds despite our repeated warnings means pensioners will be paying the price, forcing elderly people into paying incoming tax for the first time in history.
“Everyone deserves peace of mind and security in retirement, so if Labour has any respect for our pensioners, they should put a stop to their retirement tax.”
The intricacies and offsets in the present system imply nearly 2.5 million individuals are already getting government payments higher than their personal allowances, as per LCP pension consultants’ investigation.
According to Steve Webb, until recently a pension minister now working for LCP, this state of events indicates that we have a messy situation: “It’s just going to drag more pensioners into tax.”
He added: “If all you’ve got is the state pension, then you don’t have to fill in a tax return – instead you’ll get an HMRC bill in the post if you owe tax.
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