The State Pension: Potential Tax Implications for Millions of Pensioners
The state pension may see an increase exceeding £12,600 as early as next year, a change driven by the government’s triple lock policy. This adjustment could inadvertently place millions of pensioners in a position where they will owe more in taxes, according to recent analyses by financial experts.
According to a report from Deutsche Bank, the new state pension is projected to rise to £12,631 from its current rate of £11,973 in April 2026, marking a significant increase of 5.5 percent. This anticipated rise is particularly critical as the existing income tax thresholds remain frozen, meaning this increase could push many pensioners over the £12,570 personal allowance—the threshold at which income tax becomes payable—for the very first time.
This issue gained substantial traction during last year’s general election campaign, with the Labour Party declining to match the Conservative Party’s promise of a “triple lock plus” scheme. The proposed plan was designed to raise the personal allowance for pensioners by a minimum of 2.5 percent or to match the highest increase from either earnings or inflation. This adjustment aimed to ensure that pensioners would not be liable to pay income tax on their state pension.
Currently, pensioners are subject to income tax if their total income—including the state pension and any additional earnings—exceeds £12,570. However, this increase could result in approximately 450,000 individuals having to pay taxes solely on their state pension income. For those receiving the full new state pension, the tax burden could amount to just over £12 if the projected increase holds true.
Under the triple lock framework, state pensions are adjusted every April based on the highest of three metrics: the Consumer Prices Index (CPI) inflation, the average wage growth from May to July of the previous year, or a standard increase of 2.5 percent. Analysts predict that wage growth this summer could significantly influence the upcoming state pension increase. If these predictions materialize, many pensioners might find themselves in the peculiar position of returning a portion of their state pension to the tax authorities.
In an interview with The i Paper, Sanjay Raja, Deutsche Bank’s chief UK economist, stated, “Currently, our projection for average weekly earnings total pay in the three months up to July stands at an impressive 5.5 percent year on year. Our CPI inflation projection for September 2025 is around 4.25 percent. Based on these projections, we expect state pensions to rise by 5.5 percent in April 2026.”
Furthermore, wage growth—excluding bonuses—accelerated to 5.9 percent during the October to December period last year, as reported in recent figures. This growth rate significantly outpaces the UK’s inflation rate, which currently sits at 2.5 percent. However, inflation is anticipated to rise again, primarily due to increasing energy and water costs.
Experts from Capital Economics also forecast a rise in the new state pension by 5.1 percent in April of the coming year, bringing the annual amount to £12,583. Ashley Webb, the UK chief economist at Capital Economics, noted that their projections indicate a decrease in average earnings growth (including bonuses) to 5.1 percent in the three months leading to July.
Potential Tax Consequences for Retirees
Sir Steve Webb, a former pensions minister, confirmed that a significant increase in the state pension next April could easily surpass the income tax threshold. He explained, “In theory, this could result in someone with a full state pension and no other taxable income facing an annual tax liability of mere pounds or even pennies, through the simple assessment process. However, it is likely that HM Revenue & Customs (HMRC) would deem such small amounts not cost-effective to collect. Nevertheless, as pensions continue to rise, it is inevitable that these individuals will eventually receive tax demands.”
During the previous election, the Conservative Party accused Labour of planning a “retirement tax” because they did not commit to the triple-lock-plus initiative. The Labour government has yet to promise any adjustments to the income tax threshold, whether for pensioners or other taxpayers. Chancellor Rachel Reeves has stated that she does not plan to introduce further tax increases but has not ruled out the possibility of maintaining the freeze on tax thresholds, which would result in more individuals being pushed into higher tax brackets as their incomes increase.
If retirees are required to pay income tax on their state pension through a streamlined assessment process, they would not need to file a tax return, as the deductions would occur at the source.
Currently, those receiving the full new state pension will see their weekly payments rise to £230.25, translating to an annual total of £11,973, effective this April. These amounts apply to individuals who reached state pension age after April 2016 and have the full 35 qualifying years of national insurance contributions (NICs). Meanwhile, the full basic state pension for those who reached this age before April 2016 will increase to £176.45 per week, equating to £9,175 annually.
In the interim, retirees will continue to receive their state pension at the existing rate of £221.20 weekly, or £11,502.40 annually for the new state pension, and £169.50 weekly, or £8,814 annually for the basic state pension.
Dr. Dimitrios Syrrakos, a senior lecturer in economics and finance at Keele University, remarked, “With average earnings growth—excluding bonuses—almost reaching 6 percent and significantly surpassing the Office for Budget Responsibility’s estimate of 4.2 percent, this will greatly increase the financial burden associated with state pensions.” He added that this wage growth trend could also “undermine” the Bank of England’s efforts to manage inflationary pressures and stabilize the inflation rate towards the target of 2 percent.
Ros Altmann, who served as pensions minister immediately following Sir Steve, emphasized the uncertainty surrounding future earnings growth. She stated, “It’s crucial to remember that no one can predict with certainty what will happen to earnings growth in the upcoming months, particularly given the recent rise in employer NICs and the trend of increasing layoffs.” She concluded, “Forecasts are only as reliable as the assumptions they are based on, and those assumptions are subject to change.”
The Department for Work and Pensions has been approached for comment regarding these developments.
