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Millions of Britain's poorest pensioners to be hit by ‘stealth tax' as Government tries to plug hole in public finances
MILLIONS of pensioners face being hit by a "stealth tax" while the Government plans to plug the growing hole in public finances.
Media reports suggest everyone on the full state pension could be forced to pay income tax as early as next year, even if they have no other income.
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It means millions of people who have no other way to fund their retirement will start paying tax for the first time.
This is because the personal allowance - the amount of income you can have before you start to pay tax - is stuck at £12,570 at least until 2028.
Meanwhile the state pension, which is currently at £11,973 a year, is on track to go over that limit due to the triple lock system.
Under the triple lock, the state pension increases by whichever is highest out of the rate of inflation, annual earnings growth or 2.5%.
If average earnings continue to grow at their current rate of 5.2%, next year's state pension will rise above the income tax threshold for the first time.
Therefore pensioners relying entirely on the state pension will need to pay the basic tax rate of 20% on any amount above the personal allowance limit.
The exact figure they will need to pay will be confirmed later this year.
The Mail on Sunday is reporting Chancellor Rachel Reeves is considering an extension of the freeze on the personal allowance rate.
The Government is trying to plug an estimated £30billion gap in public finances - something that has become more difficult after it faced a bruising defeat this week in the Commons over its welfare reforms.
Reeves had been trying to push through a bill that would see rules tighten on eligibility for Personal Independence Payments (PIP) and also freeze the level of payments for some Universal Credit claimants.
Could you be eligible for Pension Credit?
The controversial reforms were aimed at raising billions of pounds and encouraging more people to get back into work.
But the bill was watered down after a rebellion by Labour MPs, which has left the Chancellor scrambling to find new ways to save.
The Institute for Fiscal Studies (IFS) think tank estimates Reeves could raise up to £10billion a year by 2030 if she freezes the personal allowance bands for the next two years.
The Chancellor has few options left without breaking Labour 's manifesto commitments, which include no increase in income tax, employee National Insurance contributions, VAT or corporation tax.
It's worth noting that personal allowances were frozen by the previous Government for six years until 2028.
Shadow Chancellor Sir Mel Stride The Mail on Sunday: "At the election last year the Conservatives promised to protect the state pension from being dragged into tax – Labour chose not to match that commitment.
"They claim to be protecting pensioners through the triple lock, but this stealth tax will erode its value."
How does the state pension work?
AT the moment the current state pension is paid to both men and women from age 66 - but it's due to rise to 67 by 2028 and 68 by 2046.
The state pension is a recurring payment from the government most Brits start getting when they reach State Pension age.
But not everyone gets the same amount, and you are awarded depending on your National Insurance record.
For most pensioners, it forms only part of their retirement income, as they could have other pots from a workplace pension, earning and savings.
The new state pension is based on people's National Insurance records.
Workers must have 35 qualifying years of National Insurance to get the maximum amount of the new state pension.
You earn National Insurance qualifying years through work, or by getting credits, for instance when you are looking after children and claiming child benefit.
If you have gaps, you can top up your record by paying in voluntary National Insurance contributions.
To get the old, full basic state pension, you will need 30 years of contributions or credits.
You will need at least 10 years on your NI record to get any state pension.
