Millions of pensioners in the UK are about to be impacted by a “stealth tax” as a result of the Government’s decision to freeze tax bands. This move by HMRC, which has led to growing concern, is expected to affect a significant number of retirees. Many pensioners who rely solely on the state pension may soon find themselves facing tax bills, despite having previously been exempt.
According to the Birmingham Mail, this issue is set to escalate as the state pension increases under the triple lock system, bringing more pensioners into the tax net. This article examines the details of the freeze and its financial implications.
What is a “Stealth Tax” and How Does It Affect Pensioners?
A “stealth tax” is a term used to describe taxes that are effectively imposed without any direct changes to the law. In this case, the UK Government has decided to freeze the tax bands, which is causing more and more pensioners to fall into the income tax net, even if they are receiving just the state pension.
Right now, pensioners who only receive the state pension don’t have to pay income tax. However, this is all set to change. Starting in 2027, the state pension will gradually move closer to the personal allowance threshold—the amount a person can earn tax-free each year.
In fact, by next April, the full new state pension will rise to £12,535, just £35 below the current personal allowance, which stands frozen at £12,570. This means that, for the first time, some pensioners will have to pay income tax on their state pension.
The Triple Lock: A Double-Edged Sword?
The triple lock system was designed to ensure that the state pension increases every year, at least by inflation, average wage growth, or 2.5%, whichever is highest. While this sounds like a good deal for pensioners, it creates an unintended consequence: as the state pension rises, so does the number of people who are drawn into the tax system. With the personal allowance remaining frozen, the state pension growth is pushing more people into taxable territory.
For instance, next year, the state pension is set to increase by over £550, which will push the total amount to £12,535. This continued rise, combined with the frozen tax bands, will push some pensioners over the tax-free threshold, meaning they will be required to pay tax.
Martin Lewis, a well-known financial expert, pointed out that this freeze in tax bands could lead to pensioners with just the state pension paying tax for the first time.
This will take someone on the full new state pension to £12,535 a year, only £35 below the frozen personal allowance – he explained.
So, those on the full new state pension with no other income will, for the first time, pay tax on it
due to the minimum 2.5% rise and the fact that personal allowances are frozen.
The Growing Pressure on the Government
With more pensioners being pulled into the tax system due to the Stealth Tax, the Government is under increasing pressure to reconsider its stance on frozen tax bands. Critics argue that this change is unfair, especially when many pensioners are already living on modest incomes.
The freeze in tax bands means that, while wages and pensions increase due to inflation and other factors, the tax-free threshold stays the same, and more people find themselves in the tax bracket.
This issue isn’t just about pensioners. The tax freeze affects a broad swath of the population, including middle-income earners who would normally expect their income to remain untaxed. The freeze essentially shifts the tax burden onto a larger group of people, leaving many to question if this is sustainable in the long run.
