State pension two-year alert as new tax bill could be a 'shock to many'

Many state pensioners may be shocked to receive a tax bill in the coming years. Payments keep going up thanks to the triple lock, which increases rates each April in line with the highest of 2.5 per cent, inflation, or the rise in average earnings.

But this means the full new state pension is getting very close to using up the personal allowance. This is the maximum you can earn each year without paying income tax, and is currently set at £12,570.

The full new state pension is currently £230.25 a week, or £11,973, with payment rates expected to go up 4.7 per cent next April following the triple lock.

Lily Megson-Harvey, policy director at My Pension Expert, said: "With the full new state pension set to reach around £12,534 next year and likely to exceed the frozen personal allowance by 2027, more pensioners risk being drawn into paying income tax for the first time.

"This fiscal drag could come as a shock to many and would erode the perceived benefit of the triple lock." Labour has yet to say if it will make any changes to the state pension as more people are set to be dragged into paying income tax.

The expert said the Government ought to set out its policy on the issue. She said: "This would be a blow to retirees, yes, but the biggest problem at the moment is the Government's lack of clarity on the situation.

"It's nearly impossible to prepare for any change and weather any financial aftershock. The Government must be transparent and provide clear guidance to help retirees plan effectively."

The rise in state pension payments also raises the question of how sustainable the triple lock, given the rising costs of the policy for the Treasury.

Ms Megson-Harvey said the policy has always been expensive and although Labour has pledged to keep it for the time being, it risks becoming unaffordable for the Government.

She said: "Any major changes would be politically challenging and risk undermining confidence among retirees. Instead of short-term tinkering, we'd like to see a focus on long-term sustainability and fairness.

"And of course, should any changes be announced, ensuring that support is made available to retirees to help them manage their financial plans."

Looking at other changes the Government should bring in, Ms Megson-Harvey warned there are no simple solutions. She said: "The Government should explore how those who rely on the state pension can keep as much for their retirement as possible, such as exemptions from any potential income tax.

"However, decisions must be made in consultation with the industry and with protections for the most vulnerable. Quick fixes risk adding complexity and deepening inequalities."