Daniel Hilton
The state pension has increased by 4.1%, boosting the income of 12 million retirees, but frozen tax thresholds mean hundreds of thousands of pensioners will be dragged into the tax net.
The full new state pension is now £11,973 per year, or £230.25 a week.
It means recipients who receive more than £597 in other income in 2025/26 – be it from a private or workplace pension, or work – will be pushed beyond the tax-free personal allowance of £12,570.
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The rise puts pensioners “perilously close to the amount that can be received without incurring tax liability”, Clare Moffat, pensions expert at Royal London, says.
Around 350,000 more pensioners will pay tax this year compared to 2024/25, according to analysis by former pensions minister Steve Webb.
Webb, who is now a partner at pension consultancy LCP, said 650,000 retirees will be paying income tax on their state pension alone in this tax year.
“The repeated freezes in the personal allowance for income tax, coupled with a series of significant cash increases in the rate of the state pension, have led to a situation where the majority of pensioners now pay income tax,” he said.
“Hundreds of thousands more will be dragged into the tax net this year, and some can look forward to an end-of-year ‘simple assessment’ tax demand from HMRC if they do not have any other pension income where a tax code can be used to collect what is due.”
More and more pensioners are set to be affected in future years as, if income tax thresholds are not adjusted, the full new state pension is expected to bust the personal allowance as soon as 2027.
Will I have to pay tax on my state pension?
The full new state pension of £11,973 a year is now just under the tax-free personal allowance (£12,570).
Tax thresholds have been frozen for over three years now, and aren’t expected to go up until 2028 at the earliest.
The latest forecast from the Office for Budget Responsibility (OBR), released alongside the Spring Statement in March, suggests the state pension will rise by 4.6% next year under the triple lock. That would take it to £12,569.85 a year – just 15 pence below the tax-free allowance – according to Quilter.
Greer at Quilter comments: “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.”
He adds: “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.”
The OBR predicts the state pension will then rise by 2.5% in 2027/28, taking the full new state pension to £12,885.50 a year – busting the personal allowance by £315.50.
Due to complexities in the state pension system, some retirees already pay tax on their state pension income.
The pension consultancy LCP estimates that more than one in five of all pensioners have state pensions in excess of the personal allowance, with about 2.5 million pensioners paying tax on their state pension.
Moffat at Royal London explains: “That’s normally because they’ve delayed taking their state pension or have larger amounts of additional state pension.”
In addition, most pensioners receive other income on top of the state pension. They may have a workplace pension, private pension or self-invested personal pension (SIPP).
This means some pensioners are already paying a significant amount of income tax – and the burden is growing thanks to the effects of fiscal drag.
HMRC data suggests around 8.51 million pensioners would be liable for income tax in the 2024/25 tax year. That’s 660,000 more than in 2023/24.
Meanwhile, those who already pay income tax on their pension, but at the basic rate, could find themselves pushed into a higher tax band due to the growth of the state pension.
Moffat notes: “Our research found that 21 million people aged 21-65 are unaware that the state pension is taxable, so it could come as a shock to many. Pensioners receiving additional income from private or workplace pensions will see a reduction in their monthly income payments due to tax deductions.”
In the lead-up to the general election, the Conservatives promised to increase the personal allowance for pensioners as part of their “triple lock plus” election pledge. However, this was consigned to the policy dustbin when Labour won the general election.
How much state pension will I get this year?
Following the 4.1% rise, the full new state pension is now worth £230.25 a week – or £11,973 a year. This is paid to everyone who reached state pension age after April 2016, entitling them to the “new” state pension, provided they have enough qualifying years on their National Insurance record.
Not everyone receives the full new state pension. Some people receive less.
If you reached the retirement age before this date, you may be entitled to get a lower amount of £176.45 a week on the “old” state pension. The full “old” state pension – known as the basic state pension – works out at £9,175 a year.
Ultimately, the amount you receive comes down to your age (in other words, do you get the new or basic state pension), and your number of years of recorded National Insurance contributions (NICs).
For the old pension you needed 30 years' of NICs, but for the new state pension you have to have 35 years of NICs to get the full amount, and at least 10 years to qualify for it at all.
You can get a state pension forecast from the government showing how much you could get.
Does everyone’s state pension increase with the triple lock?
The 4.1% increase is thanks to the triple lock, a guarantee by the government that the state pension will increase each year by the highest of three measures: inflation, average earnings growth, or 2.5%.
The September measure of inflation is used, which came in at 1.7%, while the wage earnings growth in the three months to July was 4.1%.
Not everyone’s state pension is protected by the triple lock.
Under a little-known rule, those entitled to an earnings-related pension on top of their basic state pension, relating to the pre-April 2016 rules, or who have topped up their state pension by paying extra National Insurance contributions, will see these elements increased in line with last September’s rate of inflation at just 1.7%.
Expat pensioners living in certain countries like Australia, Canada and New Zealand also do not benefit from the triple lock on their UK state pension.
We go into more detail about this in our article: Who will miss out on the state pension triple lock?
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