Millions of older UK households could be at risk of an unexpected financial hit, with many “not seeing it coming,” experts have warned. This month, Department for Work and Pensions (DWP) state pension payments rose by 4.1% under the triple lock mechanism, offering pensioners a much-needed boost.
However, a new concern is emerging: if state pension rates increase by 5% or more next year, recipients of the full new state pension could find themselves pushed into paying income tax for the first time — a shift that could have major financial consequences.
Why a Small Rise Could Cause a Big Problem
Rebecca Lamb, External Relations Manager at Money Wellness, explained the hidden risk: “Many people understandably assume that a small rise in their pension is a good thing. But if it pushes them just over the personal tax allowance, it won’t just mean paying a bit of income tax — it could disqualify them from Pension Credit, which in turn opens the door to a much larger loss.”
Pension Credit isn’t just about topping up income; it acts as a gateway to a range of valuable support programs, including:
- Housing Benefit
- Council Tax Reduction
- Free NHS dental and eye care
- The Warm Home Discount
- Cold Weather Payments
- Free TV licences for over-75s
If pensioners lose access to these, they could see a combined annual loss of over £8,000 — far outweighing any small pension increase.
“What’s most worrying is that many won’t see it coming,” Lamb added. “There’s no clear warning when someone is about to lose entitlement, and pensioners who aren’t online or don’t have support with money matters may not realise until it’s too late.”
Public Reaction: Frustration and Fear
The news has sparked strong reactions from the public. One Briton said, “Good, tired of paying for people that didn’t properly plan their retirement.” Another commented: “I just think it’s going to be amusing watching the mayhem of HMRC chasing thousands if not millions of pensioners for a few quid of tax.”
Others voiced concerns about fairness, with one adding: “It would be a sad day indeed if the threshold was not increased in line with the increase in pensions.”
A Deeper Risk for Pensioners
Adding to the uncertainty, many pensioners are unaware that HMRC could automatically deduct taxes from their pensions — leading to reduced monthly payments without much warning. Experts are urging the government to raise the personal allowance threshold to protect pensioners from unintended consequences.
Frequently Asked Questions (FAQs)
Q: What is the triple lock?
A: The triple lock ensures that the state pension increases each year by the highest of three measures: inflation, average earnings growth, or 2.5%.
Q: How could a pension rise trigger income tax?
A: If the full new state pension exceeds the personal tax allowance (£12,570 for 2024/25), any amount over this will be taxed at the basic income tax rate.
Q: What is Pension Credit?
A: Pension Credit is an income-related benefit that tops up weekly income to a minimum amount. It also acts as a gateway to additional support like Housing Benefit and the Warm Home Discount.
Q: How can pensioners protect themselves?
A: Pensioners should check their income against the personal tax allowance annually and seek advice if they’re close to the threshold. Applying for Pension Credit early and staying informed about tax changes is crucial.
Q: Will HMRC notify pensioners if they owe tax?
A: Not always. In many cases, tax may be deducted automatically from pension payments through the PAYE system, without a separate warning.
Q: Could the personal tax allowance be raised?
A: There is public pressure on the government to raise the threshold in line with pension increases, but no firm commitments have been made yet.
Final Thoughts
While rising pension payments are generally positive, they could have unintended negative impacts if income thresholds aren’t adjusted. Pensioners are encouraged to stay alert, review their benefits annually, and seek financial advice if unsure about their changing circumstances.
The risk of losing over £8,000 a year in crucial benefits highlights just how important it is to understand the full financial picture — and not be caught off guard.
