Hundreds of thousands of more retirees risk being dragged into paying tax as the state pension is expected to rise by more than £400 next year.
Rachel Reeves is poised to raise the state pension by more than £400 a year in line with the triple lock amid ongoing criticism over a £300 a year winter fuel raid.
Treasury documents, seen by the BBC, reveal officials expect the full new state pension to rise to around £12,000 in 2025/26, after the £900 increase in 2023.
However, increasing the state pension will hit at least 300,000 pensioners with a “retirement tax” as a result of the frozen personal allowance, according to former pensions minister Steve Webb.
Under the triple lock promise, the state pension rises each year in line with the highest of September’s inflation, wage growth or 2.5pc.
With inflation currently sitting at around 2pc, it is expected that the benefit will be uplifted in line with average earnings figures released next week.
Any decision on a pension increase will be made by Secretary of State Liz Kendall ahead of October’s Budget.
Chancellor Rachel Reeves on Monday reaffirmed the Government’s backing of the triple lock until the end of this Parliament.
Steve Webb, partner at pension consultants LCP said: “With tax thresholds frozen yet again in April 2025, even a relatively modest pension rise could drag more than 300,000 more pensioners into the tax net for the first time.
“Roughly two thirds of all pensioners now pay income tax, typically at the basic rate, so for most people a rise of £400 next April will only be worth £320 once income tax has been deducted”.
Around 140,000 pensioners have already received a tax demand this year.
During the election the Conservatives promised a ‘triple lock plus’, a commitment that the personal allowance would rise every year so that pensioners would never be taxed on their state income. However, Labour made no such pledge.
The news comes as the Government continues to battle criticism of its decision to means-test winter fuel payments.
In July Ms Reeves said winter fuel payments would be restricted to just those on pension credit from this winter in an attempt to raise £1.5bn to fix the nation’s finances. Previously it was available to anyone receiving the state pension.
As a result, pensioners now face their ‘worst winter on record’ with their bills expected to jump by almost £500 compared to last year.
On Tuesday, Reeves used the expected state pension increase to defend the decision to cut the fuel allowance. The Chancellor said the triple lock meant retirees would be £900 better off this year, whilst energy bills have also fallen from last winter’s highs.
However, analysis shows that means-testing the handout will mean that up to five in six elderly people living below the poverty line will lose out.