Chancellor Rachel Reeves (Image: Getty)
State pensioners face a "bizarre cliff edge" where they would have to hand some of their payment straight back to HMRC, an expert has warned. The latest forecasts from the budget watchdog show the state pension is set to rise by 4.6% next April to ￡12,569.85.
The Office for Budget Responsibility predicts that it would jump by another 2.5% in April 2027 to ￡12,885.50. The increases would take the state pension over the tax-free personal allowance by ￡315.50, meaning older people would have to hand back ￡63 to HMRC based on an income tax rate of 20%.
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Jon Greer, head of retirement policy at wealth management firm Quilter, said: “The OBR’s latest forecasts confirm we are fast approaching a bizarre tax cliff edge for pensioners.
"With the state pension forecast to rise by 4.6% in April 2026 under the triple lock, it will land just below the frozen personal allowance.
“That leaves the UK potentially only one year away from pensioners having to effectively hand a portion of their state pension back to the Exchequer in tax, which to many would seem perverse.
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“Reeves had committed to keeping allowances frozen until 2028 but, depending on what the actual uprating figure may be, could look to avoid the full state pension exceeding the personal allowance via the autumn statement later this year.
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“What was intended as a mechanism to protect pensioners from poverty is now colliding with fiscal drag. This situation is the result of the triple lock producing some significant increases in the state pension due to high inflation and earning figures while the government has failed to uprate tax thresholds in tandem.
“It also adds to the debate of what looks like the inevitable review of triple lock."
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Under the triple lock, the state pension rises each year by whichever is highest out of 2.5%, inflation, or average earnings growth.
But it is catching up with the personal allowance which was frozen at ￡12,570 until 2028 by the Tories.
Chancellor Rachel Reeves did not make any changes to the policy in her spring statement yesterday.