State pensioners warned of 'unexpected tax bill' from HMRC

A warning has been issued to state pensioners over fears they could be sent an unexpected tax bill. More people are set to become liable to pay income tax as state pension payments increase.

The full state pension is currently £11,973 a year, or £230.25 a week. While this figure is around £600 short of the standard Personal Allowance of £12,750, - the amount you can earn without having to pay tax on it - problems could arise for pensioners when their income increases.

Mark Pemberthy, benefits consulting leader at Gallagher, said: "The freezing of the personal allowance until at least April 2028 means that this will be a mainstream issue for the growing proportion of pensioners receiving the new state pension - particularly for those where the state pension is their only source of income in retirement.

"HMRC has a simple assessment process for collecting income tax, but this results in people getting a request for payment of unpaid tax at the end of the tax year.

"There is a big risk that this will lead to a lot confused and unhappy people in April/May 2027 unless there has been a very effective communication campaign in the meantime or a significant change in policy."

State pension payments are expected to increase by 4.7% next year due to the triple lock. The full pension will increase to £12,534.60 a year, or £241.05 a week.

Mr Pemberthy has also questioned whether the Labour Government can keep up with the escalation of state pension payments. He said: "With public finances already under strain, reform is needed soon to avoid placing an unfair burden on future generations.

"The imminent Pension Commission will look at what is required to build a future-proof pensions system that is strong, fair and sustainable, and we anticipate that this will recommend an alternative to the triple lock when it publishes its findings in 2027.

"We hope that this will have broad political consensus and be the foundation for a long term sustainable future pension strategy."

Chancellor Rachel Reeves is expected to target pensions in upcoming Autumn Budget. There is an estimated £30 billion hole in public finances and borrowing costs.

Devere Group investment director James Green said: "Frozen allowances and stealth tax rises have already drawn millions into higher brackets.

"Even a modest extension of those freezes would hit many middle-class pensioners. Anyone with UK retirement savings who lives abroad, or plans to, should be considering the implications now."

He added: "The fiscal reality keeps pressure on the Treasury to find revenue sources less politically explosive than broad income-tax hikes. Pensions are a perennially tempting option, which is why investors are acting even before any announcement."