A quarter of a million retirees are paying over £1,000 of income tax on their state pension, figures show.
Current government policy means rising state pensions are on track to collide with frozen income tax thresholds – leaving millions more retirees liable for tax bills in the next decade.
Former prime minister, Rishi Sunak, dubbed the phenomenon “Labour’s retirement tax”.
But Telegraph analysis shows around 249,000 retirees are already paying at least £1,000 of tax on their state pension income alone, while 10,700 pay over £2,000.
The six individuals with the highest state pension payments of between £43,680 and £44,200 a year pay over £6,200 in income tax.
The Telegraph analysed figures from the Department for Work and Pensions (DWP) up to May 2024, which is the most recently available data.
Rachel Reeves has committed to keeping the threshold at which people start paying income tax frozen at £12,570 until 2027-28.
A “full” new state pension pays £11,502 a year. However, Britain’s complex pension system means some over 2.6 million people already receive a state pension above the “personal allowance” limit.
Most pensioners draw some retirement income from private pensions on top of the state pension, meaning their total income tax bill is likely to be even higher.
Income tax thresholds were frozen until at least 2027-28 under the Tories. This deep-freeze helped to push an extra 2.5 million pensioners into the tax net during the party’s 14 years in power. The Chancellor said she would maintain the freeze in her October Budget.
Meanwhile, the state pension “triple lock” ensures that payments rise each year by the highest of inflation, average earnings or 2.5pc.
Rising payments and frozen thresholds mean the “full” new state pension is on course to exceed the personal allowance within the next three years.
The Tories had promised in their election manifesto to avoid the issue via its “triple lock plus” policy whereby pensioners’ tax-free allowance would rise in-line with growing state pensions.
At the time, Labour said the plans were not “credible”.
Sir Steve Webb, a former pensions minister, now a partner at pension consultants LCP, said: “With tax thresholds frozen year after year alongside state pension rises totalling over 20pc in the last three years, a rapidly increasing number of pensioners are being dragged into the tax net and those who pay tax are having to pay more and more tax each year”.
The state pension is paid to nearly 13 million retirees, around 4.2 million of whom are on the new state pension, introduced in 2016.
The rest receive the old state pension, the “basic” element of which is currently £8,798 a year – nearly £3,000 less than the new state pension.
But once additional entitlements are taken into account, the old system can be far more lucrative than the new.
Those earning higher state pension payments will be drawing money from an additional earnings-related pension, commonly known as Serps, for a maximum of £11,356 a year.
Delaying the start date for drawing the old state pension raises the starting amount by a further 10.4pc for each year deferred. By deferring for 13 years, a pensioner could push their annual income to over £45,000.
An HM Treasury spokesman said: “Older people should be able to live with the dignity and respect they deserve, and the state pension is the foundation for this. We are committed to the triple lock, and pensioners whose sole income is the new state pension and who have not deferred or receive protected payments do not pay any income tax.”
