Government told to make change as 'many' pensioners could be hit with extra tax

Independent MP James McMurdock has enquired whether the UK Government intends to review the Personal Allowance threshold to "prevent pensioners paying income tax".

The Personal Allowance has remained frozen at £12,570 since 2021, with the Labour Government confirming earlier this year that it will stay at this level until April 2028.

Nevertheless, the New State Pension is set to surpass the Personal Allowance by April 2027, and should next year's uprating be determined by the earnings growth figure of 4.8 per cent, pensioners would be left with merely £23 income breathing space before becoming liable for tax , reports the Daily Record.

In a written reply to the South Basildon and East Thurrock MP, Torsten Bell - who holds ministerial positions within the Department for Work and Pensions (DWP) and the Treasury - reassured him that "pensioners whose sole income is the full new State Pension or Basic State Pension without any increments will not pay any income tax".

Mr Bell continued: "The Government is committed to making sure older people can live with the dignity and respect they deserve in retirement. The State Pension is the foundation of the support available to them. Over the course of this Parliament, the yearly amount of the full new State Pension is currently projected to go up by around £1,900 based on the Office for Budget Responsibility's latest forecast."

Those on the full New State Pension could see their payments increase by over £570 next year under the Triple Lock, as earnings growth (4.8%) outstrips the current rate of inflation (3.8%). This would result in weekly payments of the New State Pension rising to up to £241.30 and £184.90 for those on the Basic State Pension.

The Triple Lock ensures that State Pensions increase each year in line with whichever is the highest of average annual earnings growth from May to July, the Consumer Price Index inflation rate (CPI) in the year to September or 2.5 per cent.

However, financial experts have warned that this projected rise will result in nearly 9 million pensioners paying tax in retirement. This is due to a 4.8 per cent uprating meaning that the full New State Pension will be worth £12,547 over the 2026/27 financial year, while the Personal Allowance remains frozen at £12,570.

Approximately 8.4 million people receiving the Basic State Pension will continue to receive significantly less, around £9,614 a year, but could also find themselves nearing the tax threshold if they have additional income through workplace or private pensions.

Amid increasing concerns about the long-term sustainability of State Pension increases and the tax implications for retirees, Derence Lee, Chief Finance Officer at Shepherds Friendly, has shared his expert insight into what this means for pensioners and those approaching retirement.

Lee said: "Due to the extremely high levels of inflation the UK has experienced since 2020, State Pensions have been increasing at a rate that some experts believe to be unsustainable in the long term.

"With pensions expected to surpass the frozen tax-free allowance limit next year, which will remain unchanged by the government until 2028, more retirees will be pushed into the tax-paying bracket. As a result, pensioners should begin to take into account that they may soon need to pay income tax on their pensions should no changes be made to the current status quo.

"Whilst the Triple Lock has been helpful in ensuring retirees' incomes keep up with the cost of living, taxing pensioners could have significant financial implications, particularly for those who rely heavily on their pensions to cover essential living costs and make ends meet."

The finance expert continued: "To help with retirement costs, Pension Credit can help those of State Pension age on lower incomes. For example, single pensioners can get their weekly allowance topped up to £218.15, or £332.95 as a couple, both of which are below the tax-free allowance threshold.

"Furthermore, those still working part-time or receiving self-employed income might consider making additional contributions to a private pension to help with costs once they retire from work completely."

The Triple Lock is currently set to be determined by the earnings growth element of 4.8 per cent (including bonuses). The Consumer Price Index (CPI) for September will be published on 22 October and is forecasted to be 4 per cent.

Chancellor Rachel Reeves will confirm the annual uprating at the Autumn Budget on 26 November. An uprating of 4.8 per cent on the current State Pension would result in the following amounts being received.

• Weekly: £241.30 (from £230.25)
• Four-weekly pay period: £965.20
• Annual amount: £12,547

• Weekly: £184.90 (from £176.45)
• Four-weekly pay period: £739.60
• Annual amount: £9,614

The latest figures from the Department for Work and Pensions (DWP) show there are now 13 million people of State Pension age across the country. The current official age of retirement is 66 and set to rise to 67 between 2027 and 2028.

HM Revenue and Customs (HMRC) data indicates that 8.7m pensioners are projected to pay income tax on their retirement income for 2025/26. It marks an increase of around 420,000 compared to the previous year (2024/25) and a rise of 1.85m from 10 years ago (2015/16).

Guidance on GOV.UK states: "You pay tax if your total annual income adds up to more than your Personal Allowance. Find out about your Personal Allowance and Income Tax rates.

Your total income could include:

• the State Pension you get - Basic or New State Pension
• Additional State Pension
• a private pension (workplace or personal) - you can take some of this tax-free
• earnings from employment or self-employment
• any taxable benefits you get
• any other income, such as money from investments, property or savings

Before you can check, you will need to know:

• if you have a State Pension or a private pension
• how much State Pension and private pension income you will get this tax year (April 6 to April 5)
• the amount of any other taxable income you’ll get this tax year (for example, from employment or state benefits)

You cannot use this tool if you get:

• any foreign income
• Marriage Allowance
• Blind Person’s Allowance

Use this online tool at GOV.UK to check if you have to pay tax on your pension.

The full guide to tax when you get a pension can be found on GOV.UK here.