Thousands of older Britons who receive State Pension top-ups are facing unexpected tax demands from HMRC, despite the Chancellor’s pledge to protect low-income retirees.
Alan Perkins, 71, a former heating engineer who worked overtime shifts for 50 years, retired last year expecting a tax-free state pension but instead received an £800 bill.
His annual income of around £16,500, boosted by historical top-ups from the State Earnings-Related Pension Scheme, exceeds the frozen £12,570 personal allowance, triggering 20% tax on the excess.
Mr Perkins said: “I worked like a dog, leaving at 6.30am and returning at 10.30pm, plus weekend minicab driving. I barely saw my children grow up. Now, in retirement, they tax my pension. I never thought that would happen.”
Chancellor Rachel Reeves announced that pensioners whose “sole income is the basic or new State Pension without any increments” will be exempt from income tax, even on small overages.
The full new state pension, currently around £11,973 annually, is set to rise by 4.8% to £12,547 in April under the triple lock, sitting just below the personal allowance threshold.
However, by 2027, the standard state pension payment is expected to breach the threshold for the first time, drawing even more retirees into the tax net.
Critics have labelled the Reeves exemption a “cliff-edge” policy that creates unfairness between pensioners with similar incomes but different pension structures.
Sir Steve Webb, former pensions minister, said: “The proposed policy favours one very specific group for no very obvious reason. Two neighbours with identical incomes—one on the standard new pension, one on old basic plus Serps—could face different tax treatment. This is completely indefensible.”
Baroness Ros Altmann warned: “This policy is fraught with risks that will hit people on the wrong side of the cliff-edge, while others will not be affected at all.”
The Low Income Tax Reform Group has urged Reeves to clarify details, warning the exemption risks being unfair and adding further complexity to the tax system.
The personal allowance freeze, started by Rishi Sunak in 2021 and extended by Reeves to 2031, continues to drive fiscal drag, pulling more low-income retirees into the tax system.
Mr Perkins’ bill could reach £1,300 by 2031 under continued triple lock increases, with Treasury sources confirming the exemption excludes Serps-enhanced pensions entirely.
Mr Perkins told the Telegraph: “This mess started with Sunak, but Ms Reeves’ exemption? Big deal—I’m already paying. Does she not realise people like me exist?”
Experts predict thousands more pensioners will be caught as state pension payments grow faster than frozen thresholds, deepening tensions in a strategy that appears to protect some retirees while penalising others.