Reeves won’t scrap ‘retirement tax’ as Triple Lock to drag millions into payments

Hundreds of thousands of pensioners are set to be dragged into paying income tax as soon as next year as the Treasury rejects calls to scrap a so-called “retirement tax”.

The Government has refused to reveal how many older people will be paying tax for the first time in retirement once the default rate of the state pension climbs higher than the income tax threshold.

And there is no sign of a climbdown on the policy despite a backlash from senior Labour figures, including Rachel Reeves, when the previous Conservative government first announced it.

From Sunday, the rate of the new state pension will be £230.25 a week, which amounts to £12,014 annually. The “personal allowance” for income tax – the amount you can earn without having to pay tax – is £12,570, meaning that anyone whose income comes entirely from the state pension will not have to pay.

The income tax threshold has been frozen for at least the next three years and is not due to rise in line with inflation.

But the state pension increases each year according to the “triple lock” policy, which specifies that it should go up by the same rate as inflation, average growth in wages or 2.5 per cent – whichever is the highest.

Economists forecast that the new state pension will exceed the personal allowance from next April, and even if that proves incorrect, it will inevitably be higher from April 2027 because the minimum annual increase of 2.5 per cent would be enough to put it over the threshold.

During last year’s general election campaign, the Tories proposed a higher income tax threshold for pensioners to ensure they would never be dragged into paying it unless they had other forms of income such as private pension, investments or wages.

Asked by an MP how many more pensioners would be paying income tax in future as a result of the freeze, the Government this week refused to answer. Treasury minister James Murray said: “The Government is committed to ensuring that older people are able to live with the dignity and respect they deserve, and the state pension is the foundation of state support for older people. The Government is committed to the triple lock for the duration of this parliament, and in April 2025, the basic and new state pension will increase by 4.1 per cent.

“The previous government made the decision to freeze the income tax personal allowance at its current level of £12,570 until April 2028. At our first Budget, we decided not to extend the freeze on personal tax thresholds and, as a result, they will rise with inflation from April 2028, meaning people will keep more of their income.”

Around 30 per cent of the UK’s 13 million pensioners do not have a private pension, according to official statistics, although some of those may have other sources of income.

Mel Stride, the shadow Chancellor, told The i Paper: “Labour will drag millions of pensioners into paying income tax on their state pension, and ministers will not tell us how many will be impacted. This comes on top of slashing winter fuel payments for 10 million pensioners, something Labour promised they would not do.”

At the time of the Conservatives’ final Budget in March last year, Labour MPs who are now ministers were sharply critical of the decision to make more pensioners pay a higher rate of tax.

Reeves, now the Chancellor, told the House of Commons: “As the Resolution Foundation highlighted just this morning, the eight million tax-paying pensioners will see their taxes increase by an average of £1,000. That is a collective £8bn tax grab from our nation’s pensioners… It is a fact that because the tax thresholds have been frozen, pensioners who pay tax are paying more tax than they were before. That is the legacy of this Government. This is not just about lines on a graph.”

Her deputy, Darren Jones, added: “Tax thresholds are being frozen for the next five years, which will increase the tax take overall by an additional £40bn, so 3.7 million people, including pensioners, who are not paying tax at all will do so by 2028-29 under the Conservatives.”

Wes Streeting, now the Health Secretary, said that “eight million pensioners will see their taxes increase as a result of this chancellor’s decisions” and added: “I do not think that is right or just.” Nia Griffith, a minister in the Wales Office, accused the Tories of a “stealthy drip-feed of the poison of freezing tax thresholds”.

Torsten Bell, who was at the time the head of the Resolution Foundation think tank, wrote a comment piece with the headline “How Jeremy Hunt’s tax freeze is leaving pensioners out in the cold”. He is now a Labour MP and a minister in the Treasury, and said in Parliament last month: “The majority of pensioners pay income tax because of decisions taken by the previous government.”

A source close to Reeves denied that she was being hypocritical by keeping the freeze on income tax thresholds, telling The i Paper: “It is the job of the opposition to expose what the last government was doing on thresholds, but at the same time we have got to be honest that this is the inheritance we have got. Any change to the thresholds is not cost-free, and there is no easy option – but there are people who have said we should scrap the triple lock, which we have resisted. There were people who said we should have extended the thresholds freeze last year, which we have not done.”

Caroline Abrahams, the head of the charity Age UK, warned that having to pay tax, even in small amounts, would be a burden on some older people and bring in little gain for the Treasury. She said: “It’s needlessly bureaucratic for the state to give these older people money with one hand, only to take it away with the other. It also means many more older people will have to complete a tax return, which some will find stressful and difficult, as well as pushing more admin onto HMRC which is already struggling with its existing workload.

“Older people have raised concerns with us at Age UK about this looming problem, and as a charity we have been calling for personal allowances to rise again. This would help older people in a few years’ time, and more immediately would provide some much-needed relief for those with modest private pensions who are paying income tax already, and who are finding life tough because of inflation.”

Silver Voices has been running a petition on the issue, which has attracted 120,000 signatures, and the campaign group has vowed to step up its lobbying of the Chancellor in the run-up to the next Budget expected in the autumn.

Daisy Cooper, deputy leader of the Liberal Democrats, said: “Pensioners who are already struggling to make ends meet and just had their winter fuel payment cut will see this as yet another blow. It’s another shameful legacy of the last government whose current leader is seriously considering slashing the state pension and put in place years of unfair stealth taxes, hitting people’s hard-earned pensions.”

A Treasury spokesman said: “We are committed to help our pensioners live their lives with dignity and respect, which is why we have frozen fuel duty and increased the state pension to leave pensioner couples up to £88 better off a month. Our commitment to the triple lock means millions will see their pension rise by up to £1,900 this parliament.”