Revealed: How millions of ordinary pensioners now face a stealth state pension

Everyone on the full state pension will be forced to pay income tax as early as next year – even if they have no other income, The Mail on Sunday can reveal.

One former minister warned the raid on some of the poorest pensioners who have never had to fill in a tax return before will be an ‘administrative nightmare’.

It means millions of people who have no other way to fund their retirement face being dragged into the tax net.

The alarming prospect arises because the personal allowance – the level at which income becomes taxable – is stuck at £12,570 at least until 2028.

But the state pension, which pays 12.9 million men and women over the age of 66 up to £11,973 a year, is on track to breach that limit before then because of higher-than-expected growth in wages, especially in the public sector.

Under the triple-lock system, the state pension increases by the rate of inflation, annual earnings growth or 2.5 per cent – whichever is the highest.

But if average earnings continue to grow at their current rate of 5.2 per cent, next year’s state pension will rise above the income tax threshold for the first time since it was introduced more than a century ago.

That would force pensioners who rely entirely on the state pension to pay the basic tax rate of 20 per cent on any amount above the personal allowance limit. The exact figure will be confirmed later this year. The hardest hit will be those who retired after 2016 and have paid a full 35 years of national insurance contributions.

Chancellor Rachel Reeves is eyeing an extension of the freeze to plug an estimated £30 billion gap in the public finances

Former pensions minister Baroness Altmann said: ‘Many elderly people have never done a tax return or paid tax themselves. They will not know what to do and may struggle to get through to the helplines, which could be overwhelmed’

Former pensions minister Baroness Altmann said: ‘Many elderly people have never done a tax return or paid tax themselves. They will not know what to do and may struggle to get through to the helplines, which could be overwhelmed.

‘It’s a serious potential administrative nightmare for many elderly pensioners, and also for HM Revenue & Customs.’

Almost 9 million pensioners will pay tax on their retirement income this year, according to HMRC, compared with just 1.85 million a decade ago.

It is the result of a punishing stealth tax raid that began

under the previous Government, when personal allowances were frozen for six years until 2028 in a move that has raised far more money for the Treasury than expected.

Chancellor Rachel Reeves is eyeing an extension of the freeze to plug an estimated £30 billion gap in the public finances.

She could raise up to £10 billion a year by 2030 if the existing personal allowance bands were kept for another two years, according to the influential Institute for Fiscal Studies (IFS) think-tank. It is one of the biggest tax-raising options left for the Chancellor after she vowed not to break Labour’s manifesto commitments, which include no increase in income tax, employee national insurance contributions, VAT or corporation tax.

The Government has also promised to keep the pensions triple lock during this parliamentary term, though pensions minister Torsten Bell has previously called for it to be replaced when he ran the Resolution Foundation think-tank.

The IFS is also urging ministers to ditch the guarantee.

It also found that half of middle and high earners in company schemes were not on track to avoid big falls in living standards after they stop working.

Despite this lack of pension savings, Reeves (pictured) may still raid retirement pots to balance the books after saying there would be ‘a cost’ to last week’s Government U-turn over welfare reforms that were meant to save the taxpayer £5 billion.

One option is to cut the amount of lump sum retirement savings that can be withdrawn tax-free from £268,000 to £100,000, saving £2 billion a year, according to the IFS.

Reeves could also target private pension pots by levelling up the tax relief that can be claimed to 30 per cent. Basic-rate taxpayers receive 20 per cent relief on their pension contributions, whereas higher-rate taxpayers get 40 per cent. Or she could restore the £1,073,000 pensions lifetime allowance limit, which was suggested by Deputy Prime Minister Angela Rayner in a leaked memo.

Such a move would risk another clash with NHS doctors on gold-plated pensions, who have threatened to quit in droves if the cap is reintroduced.