'State pension tax trap': Around 820,000 pensioners set to pay income tax on pension alone within two years

Frozen personal tax allowances and rising state pension payments are expected to push hundreds of thousands into paying income tax

Around 820,000 pensioners are expected to become liable for income tax on their state pension alone within the next two years, according to new analysis.

The increase is being driven by rising state pension payments alongside frozen income tax thresholds, which have remained unchanged since the 2021/22 tax year.

Britain's 12 million pensioners could be affected as the full new state pension moves closer to exceeding the personal allowance.

The personal allowance, which is the level of income people can earn before paying income tax, has remained frozen at £12,570 for the past five years.

Meanwhile, the full new state pension has increased to £12,547.60 a year, leaving a difference of just £23 before pensioners become liable for income tax.

Under the triple lock, the state pension rises each year by the highest of inflation, average earnings growth or 2.5 per cent.

Even an increase of 2.5 per cent would push the full new state pension above the personal allowance in the 2027/28 tax year, meaning pensioners with no other income could face an income tax bill.

Government officials are considering deducting income tax directly from state pension payments rather than issuing tax bills afterwards.

However, critics have argued the approach could leave pensioners temporarily out of pocket if HM Revenue and Customs deducts too much tax initially before issuing a refund.

Maike Currie, vice president of personal finance at PensionBee, said: "The challenges over taxing the state pension highlight just how complicated the interaction between the Triple Lock and frozen tax thresholds has become.

"Any changes need to be carefully designed so pensioners pay the right amount of tax without creating unnecessary complexity or confusion."

Since it was introduced in 2011, the triple lock has increased the basic state pension by more than 80 per cent.

Weekly payments have risen from £102.15 in 2011/12 to £184.90 today, outpacing the roughly 65 per cent increase in living costs over the same period.

The current full new state pension of £241 a week is estimated to be around £30 higher, or approximately 14 per cent more, than it would have been had payments increased in line with average earnings alone.

The policy has also increased spending on the state pension.

Expenditure on the state pension has risen from 3.5 per cent of gross domestic product at the start of the millennium to around 5 per cent today.

The state pension is now the second-largest area of Government spending after the NHS.

Incoming Labour leader Andy Burnham has confirmed the party's commitment to the triple lock remains in place, matching the positions of Keir Starmer, the Conservatives and Reform UK.

However, politicians and think tanks have increasingly questioned whether the policy will remain affordable in the long term.

Ms Currie said: "The ongoing Triple Lock debate is a reminder that pension policy can and does change. While the Triple Lock remains in place today, no Government can guarantee what the system will look like decades from now."

She added that building private pension savings alongside the state pension could provide greater financial flexibility regardless of future Government policy.