Hundreds of thousands of state pensioners aged 80 and over are receiving what experts describe as an "inevitable" letter from HMRC, with warnings the financial squeeze will intensify. The issue centres on retirees whose total income, including State Pension and SERPS (State Earnings-Related Pension Scheme) top-ups, now exceeds the frozen personal tax allowance.
The Rising Tide of 'Retirement Tax'
New figures reveal a sharp increase in the number of pensioners facing significant tax bills solely on their state pension income. In the last financial year, more than 320,000 retirees paid at least £1,000 in tax on their state pension. This marks a substantial rise of 71,000 from the 249,000 recorded the previous year.
The data shows a particularly heavy impact on the oldest pensioners. Those aged 80 and over were five times more likely than younger retirees to receive a tax demand of £1,000 or more. Furthermore, the number of pensioners paying a minimum of £2,000 in tax on this income surged by 48%, from 10,700 to 15,800.
Frozen Thresholds vs. The Triple Lock
Wealth managers and analysts point to a direct clash between two government policies as the root cause. The personal income tax allowance has been frozen since 2021 and is set to remain so until 2028. Meanwhile, the state pension continues to increase annually under the triple lock guarantee, which raises it by the highest of inflation, average earnings growth, or 2.5%.
This combination has pulled a growing cohort of pensioners into the tax net. Currently, around one in four retirees (3.2 million) have a state pension that exceeds the personal allowance, meaning a portion of it is subject to income tax.
Expert Warnings: 'It Will Only Get Worse'
Tom Selby, director of public policy at investment platform AJ Bell, stated the situation is a direct consequence of the frozen thresholds. "Pensioners being taxed on at least a portion of their state pension income is an inevitable consequence of the freezing of tax thresholds and will only get worse in the coming years," he said.
Selby added that while unfreezing the allowances is the "only sensible route out of this mess," such a move is unlikely before the next decade.
Adam Cole, head of wealth planning at Quilter, highlighted the real-world impact on living standards. "With the personal allowance stuck in place while the state pension continues to rise, more retirees are being pulled into tax without any meaningful improvement in their living standards," he explained.
Cole emphasised a growing policy disconnect, where state pension increases, driven by government uprating decisions, are effectively clawed back through taxation because allowances have not kept pace with inflation. "The result is that pensioners are increasingly taxed on income designed to provide security, not discretionary spending," he concluded.
