Controversial rules confirmed by Rachel Reeves will result in more pensioners being dragged into paying income tax. Critics say the 'stealth tax' policy is unfair. The Chancellor has decided to keep tax bands frozen, which will see more over-65s have to pay tax. This could include those with only modest private pension pots or others earning interest on savings.
Fiscal Drag Explained
Freezing tax thresholds is a controversial policy. They have been kept at the same level since 2021. But over that time household earnings have increased, putting some into new tax bands. This includes retirees, as the state pension increases each year under the terms of the triple lock. It's known as fiscal drag, as the Government rakes in more tax as people's incomes increase.
Impact on Pensioners
While over-65s who have the state pension as their sole income will not be taxed, it only takes a modest private pension pot or small amount of interest from savings to take them past the £12,570 personal allowance limit. An extra 600,000 pensioners are expected to have to pay income tax in 2026/27 because of this policy.
An Assistance for Seniors spokesperson said: "This is no longer a problem affecting only those with substantial pension pots. We are fast approaching a point where simply receiving the full state pension, alongside even a modest amount of savings interest, is enough to trigger a tax bill."
Derence Lee, chief finance officer at Shepherds Friendly, said: "With the full new state pension rising to £11,973 in April, and personal allowance now frozen at £12,570 until 2031, more retirees are edging dangerously close to paying income tax on their state pension."
