Record 10 million pensioners to be caught in state pension tax trap this year

A record 10 million pensioners are expected to pay income tax this year, according to new HMRC figures.

The number has risen sharply since income tax thresholds were frozen five years ago, pulling millions more older people into the tax system.

Department for Work and Pensions figures show that around 9.58 million of the 12.2 million people receiving the State Pension are now expected to pay income tax.

That means more than seven in 10 State Pension recipients are now taxpayers.

HMRC expects the number to rise even further, reaching 10.2 million by April.

The increase is being driven by the freeze on the personal allowance, which has remained at £12,570 since 2021 and is due to stay at that level until 2031.

At the same time, the State Pension continues to rise each year under the triple lock, which increases payments by whichever is highest: inflation, wage growth or 2.5 per cent.

Together, these two policies have created what tax experts call fiscal drag, where more people end up paying tax because their income rises while tax thresholds stay the same - essentially a tax trap.

Tim Stovold from Moore Kingston Smith said this approach "continues to give the government a tax windfall".

The higher rate threshold of £50,270 has similarly been frozen since 2021, pulling more retirees into the 40 per cent bracket.

In April 2027, the full new state pension will surpass the tax-free threshold for the first time, creating a situation where the government would effectively tax money it has just paid out.

Steve Webb, former pensions minister and now a partner at consultancy Lane Clark & Peacock, said: "The surge in older people paying income tax is continuing, with record numbers of taxpaying pensioners in 2026/27."

He added: "The system is changing by stealth as allowances are frozen and pensions rise, bringing millions more people on modest incomes into the tax net."

Mr Webb called for a comprehensive review rather than quick fixes.

Rachel Reeves announced during the 2025 Autumn Budget that a scheme would protect those whose only income is the state pension from facing tax bills.

However, this approach could establish a two-tier system for pensioners, with someone earning just £1 from a private pension potentially losing the exemption entirely.

It would also mean workers and retirees with identical incomes being treated differently by HMRC.

The Treasury defended the current arrangements, noting that British pensioners enjoy the highest tax-free allowance among G7 nations.

It remains uncertain whether incoming prime minister Andy Burnham and his chosen chancellor will maintain Ms Reeves's commitment.