Millions of pensioners could be hit with a £100 'retirement stealth tax' on their state pension from next spring.

Unless the full state pension is your only income, or you are living on less than that anyway, you will see some of it clawed back by the taxman.

That is because the full-rate state pension is on course to top £13,000 a year, busting the basic-rate income tax threshold of £12,570 a year.

While the bump in income is welcome, news that the taxman is going to take a chunk of it straight back again will infuriate many pensioners.

Older Money Mail readers have in the past told us in no uncertain terms that they don't believe any tax should be levied on a state pension which they earned by stumping up National Insurance contributions throughout their working lives.

The Government is alive to the widespread discontent and has promised to lift those whose sole income is the full state pension 'without any increments' out of income tax.

But the vast majority of pensioners won't qualify for this waiver – and leading pension experts warn that the Government's 'grossly unfair' solution will lumber retirees with a two-tier tax system.

Here, we explain the looming state pension stealth tax trap, how much you can expect to lose, whom exactly the Government plans to let off a tax bill – and whom it won't.

Why will state pension be taxed?

In April next year the headline state pension is expected to rise from the current £241.30 a week to £251.20 a week, amounting to a £500-a-year increase.

This is thanks to the triple-lock pledge that promises to raise the state pension by the highest of three figures – inflation, average wage growth or 2.5 per cent.

If the state pension increases as expected, worked out as a 52-week annual income, it will be £13,062 from April 2027. This is more than the £12,570 tax-free personal allowance, which has been frozen since 2021.

Taxing the headline state pension after it breaches the personal allowance next spring represents a step-change. And it is a step-change that's not likely to be corrected any time soon.

This is because the initial freeze on every tax bracket, which was originally due to run to 2026, was extended to 2028 by Jeremy Hunt as chancellor, then until 2031 by Rachel Reeves when she was chancellor in her November 2025 budget.

Meanwhile, the state pension triple lock has been guaranteed until at least the next election.

The latest wage growth figure published a couple of weeks ago was 4.1 per cent, while the most recent inflation figure – using the consumer price index measure – was 2.6 per cent.

The benchmark average earnings growth figure due out on September 15 is now practically certain to decide the spring state pension rise, as it will be higher than inflation.

If there is a 4.1 per cent increase, the full-rate new state pension for those retiring after 2016 should rise to £251.20 from April 2027.

People who retired before April 2016 on the old basic state pension would see a rise from the current £184.90 a week to £192.50, or just shy of £400 a year to about £10,000, still well below the tax threshold if that is their only income.

These people get less basic state pension than those who retired after 2016 because they either paid reduced National Insurance, which went into their work pension instead, or are paid generous top-ups known as the State Earnings-Related Pension Scheme (Serps) or the State Second Pension (S2P).

Derence Lee, chief finance officer at the mutual society and life insurer Shepherds Friendly, says that the triple lock is designed to protect pensioners from rising living costs.

However, as the state pension rises they could see a growing proportion of their income exposed to income tax through 'fiscal drag' – this is when frozen thresholds push people into higher tax brackets.

'More pensioners could find themselves paying income tax as their total taxable income rises above the threshold – and particularly those with private pensions or other taxable income,' says Mr Lee.

Pensioners' tax bills will grow

Plenty of pensioners who have built up any private work or personal pensions, or have other income that pushes them above this level are already taxpayers.

So are state pensioners who retired before 2016 and earned sizeable top-ups through Serps or S2P during their working lives.

Altogether, more than ten million pensioners are now paying income tax, setting a new record since thresholds were frozen five years ago, according to official figures that were released in July. 

A new breakdown by tax bracket shows the number of pensioners paying 20 per cent basic-rate tax has risen by a third to 8.48 million over the past five years.

The HM Revenue & Customs figures, obtained under a freedom of information request by pension consultant LCP, also show that the number liable for 40 per cent higher-rate tax has doubled to 977,000. Meanwhile, the number paying the 45 per cent additional rate has trebled to 115,000.

The triple lock has protected pensioners' incomes over the past decade, but a contradiction in the system is now being exposed, according to Aaron Bright, investment analyst at online trading provider IG Group.

Mr Bright, who has crunched the numbers on future state pension tax bills, says: 'As the state pension rises, more of those increases risk being pulled into the income tax net. That creates what is effectively a retirement stealth tax.

'Pensioners are promised inflation-linked increases to help protect their standard of living, only for a growing share of those increases to be eroded through taxation.'

Your future state pension tax bill

Older people could face a £98-a-year tax bill on their state pension if the full rate rises by 4.1 per cent in 2027-28, according to IG's calculations.

They would be paying basic-rate tax on a £492 slice of their £13,062 annual state pension in this scenario.

IG also looked ahead at how the state pension tax bill could soar in future years.

It assumed future state pension rises of 2.5 per cent, the lowest rate at which it could increase under the triple lock.

And it anticipated that once the £12,570 personal allowance was unfrozen in 2031 it would resume rising broadly in line with its typical pace of about £300 every two years.

This would mean a £310 tax bill on a £1,549 portion of a £14,419 state pension in 2031-32. Five years later, the bill could jump to £509 on a £2,543 chunk of a state pension worth £16,313 in 2036-37.

Still further ahead, you could expect to pay £817 on £4,087 of a state pension that could have risen to £18,457 by 2041-42.

And you could be looking at a £1,122 tax bill levied on £5,612 of your £20,882 state pension in 2046-47.

Two-tier plan for state pension tax

The Government says it will let older people off paying income tax if their 'only income is the full new or basic state pension without any increments'.

But the measure promised for the rest of this parliament will benefit just one in 18 pensioners, according to a study by LCP conducted earlier this year. 

This creates a two-tier solution, where some are let off tax but others pay it.

No one on the old state pension is likely to be excused. While the basic rate is less than the personal allowance, if you earned the generous Serps or S2P top-ups they count as an 'increment'.

Meanwhile, earning just one pound of other taxable income in retirement could see you disqualified.

Details are still pending, but people who delayed taking the state pension and so get higher payments are also among those set to be excluded.

You currently get an extra 5.8 per cent added to your state pension for each year you defer.

People who reached state pension age before April 2016 get a more generous bump of 10.4 per cent for each year they defer, or can choose a lump sum plus interest instead.

The plan could drive a wedge between those pensioners who are exempt and those who are still expected to pay tax and get increasingly larger bills.

It could also encourage counter-productive behaviour to qualify for the waiver, such as not deferring your state pension when that could save you tax if you still earn a salary.

Former pensions minister Steve Webb, who is a partner at LCP, says: 'The plan to exempt a small group of pensioners from income tax for the next three years is riddled with problems.

'It will be seen as grossly unfair by older pensioners on the old state pension system, whose income could tip over the tax threshold but who will not qualify. It will penalise those who have simply deferred taking their state pension.

'It will penalise those with small amounts of private pension compared with those who have not saved at all.'

Mr Webb also questioned what would happen if the exemption ended at the end of this parliament – in about three years' time unless an election is called sooner.

Pensioners could suddenly go back to facing tax bills running to hundreds of pounds a year.

He is calling for a systematic review of the way pensioners are taxed, rather than what he dubs a 'sticking-plaster solution'.

Jenny Holt, customer savings and investment director at life insurer Standard Life, says: 'Protecting people whose only income is the state pension from small tax bills and unnecessary administration makes sense, but the practical detail will be important.

'Any solution needs to be simple, avoid unexpected bills or cliff edges, and ensure that people don't feel penalised for having made additional provision for retirement.'

Is it fair to tax the state pension?

Taxing the state pension is arguably a way to help offset the mounting cost of maintaining the triple lock guarantee – which is popular but often decried as unsustainable in the long run – by raking in more cash from richer pensioners.

Another option to defray the cost is raising the state pension age, which is currently under review, but seen as penalising older pensioners in poorer health.

Meanwhile, the state pension has only become high enough to be taxed because of a series of above-inflation increases in recent years.

But many older people will see it as unfair when state pensions have been paid for through National Insurance contributions, or qualified for in some other way such as family caring duties, or illness or disability.

There is also the practical anomaly (some would call it a nonsense) of the Department for Work and Pensions paying out state pensions, while the Treasury then takes some of the cash straight back off pensioners again.

'It's understandable that some pensioners may feel frustrated at the prospect of paying tax on the state pension, particularly when many see it as something they have built up through a lifetime of national insurance contributions,' says Ms Holt.

'That feeling is likely to be particularly strong among those relying on the state pension alone.'

Ms Holt notes that if the personal allowance had kept pace with inflation, it would be £16,072 this year.

Mr Bright at IG Group says: 'The Government will now increasingly face a choice – accept that more state pension income becomes taxable, continue making ad hoc changes to prevent that happening, or review how the triple lock operates over the longer term.'

A Treasury spokesman said: 'Pensioners whose only income is the full new or basic state pension without any increments will not pay income tax and we are committed to that over this parliament.

'By keeping the triple lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from one of the most generous personal allowances in the G7.'

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