State pension could rise by £560 next year – triggering pensioner tax for first time in 2027

The full new state pension is set to increase by just over £560 a year next April, ushering in a new era where pensioners relying solely on the state pension will pay income tax for the first time from 2027.

The significant increase expected next year is due to a bumper rise in earnings. Average wage growth (including bonuses) in the three months to July 2025 grew 4.7%, data published today showed, although this figure could be revised up or down at a later date. The July earnings figure, published in September, is usually used as the earnings part of the triple lock.

On the basis the earnings figure holds, this will take the full new state pension to £12,534 per year – less than a pound a week short of the basic rate income tax threshold of £12,570.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

With the triple lock formula guaranteeing an increase of at least 2.5% the following year, the headline rate of the new state pension is certain to exceed the current tax threshold by 2027.

An April 2026 increase of 4.7%, followed by a further increase of (at least) 2.5%, would take the full new state pension to at least £12,850 in April 2027 – above the expected level of the tax threshold.

This means, for the first time, anyone relying just on the state pension in retirement will have to pay income tax.

Steve Webb, partner at pension consultants LCP, said: “The standard rate of the new state pension is creeping ever closer to the frozen personal tax allowance. Indeed, we know for certain that someone who has no other income aside from the new state pension will be a taxpayer come April 2027.

“It is already the case that nearly three quarters of all pensioners pay income tax, and the ongoing freeze in tax thresholds coupled with steady rises in the pension will drag more and more into the tax net.”

What is the triple lock?

The ’triple lock’ rule means the state pension will rise by the highest of:

• The growth in average earnings (including bonuses) in the three months to July – this figure is 4.7%, though that could be revised.
• The growth in CPI inflation in the year to September;
• A floor of 2.5%, which will not be relevant this year.

Inflation in the year to July was 3.8%, and August’s figures will be published on 17 September. The September figure which feeds into the triple lock will be published in mid October. If inflation continues to rise this could exceed the earnings growth figure, though the Bank of England recently estimated CPI would not go above 4% this year.

How much state pension will I get in 2026?

Most pensioners are on the old basic state pension. While their pension also rises under the triple lock, because the old state pension is lower, it typically increases by less.

If the state pension does end up rising by 4.7%, the new rates of the (old) basic state pension and the new state pension are shown in the table, in pounds per week and pounds per year.

For pensioners who receive the ‘additional state pension’ (also known as SERPS or State Second Pension) on top of their basic pension, this additional element will be increased in line with the CPI figure for the year to September.

Will the triple lock be scrapped?

The government has repeatedly committed to the triple lock for the remainder of this Parliament.

But an increase of 4.7% in the headline rate of the pension would actually be slightly more than the 4.6% assumed by the Office for Budget Responsibility (OBR) in its March 2025 ‘Economic and Fiscal Outlook’, which fed into its assessment of the state of the public finances at the time.

David Brooks, head of policy at independent financial services consultancy Broadstone, said: “The good news for millions of pensioners is that they will receive hundreds of pounds more income every year at a time when many still face persistent cost-of-living pressures and depend heavily on the state pension as their main income.

“At a time of strained public finances, however, the rising cost of funding this benefit will once more come under scrutiny especially given the ongoing State Pension Age Review.

“Debate over the future of the triple lock itself, means-testing or alternative funding, such as via the introduction of a national insurance contribution of some kind, is likely to intensify.”

“The debate should be around whether the increase is dictated by an earnings link or an inflation link should be a priority,” Brooks added.

Revived Pension Commission

In July, the government revived the Pensions Commission as part of a long-term plan to address the pension under-saving crisis of those due to retire in the mid-century. As part of this, the Commission will look at the relative success of automatic enrolment, contribution rates among employers and workers and solutions for the self-employed.

But the Commission also promises to look at the balance between all types of pensions.

Rachel Vahey, head of public policy at AJ Bell, said: “That could mean a review of the state pension as well, at the same time as the government launches its formal review of the state pension age.”

The state pension age will gradually increase to age 67 between 2026 and 2028. It’s also due to rise to 68 in the mid-2040s.

“It’s entirely possible – if not likely – this latest state pension age review will advocate bringing forward that increase to the late 2030s to save future governments’ money,” said Vahey.

“As the state pension grows ever closer to the frozen personal allowance threshold it could be that the government is finally forced to address the question of how much the state pension should really offer, at what age, and how it can increase payments sustainably each year,” she added.