Triple Lock rise may push some pensioners over HMRC revenue tax threshold
Experts warn frozen tax thresholds could drag more pensioners into paying income tax
Experts warned that the gap between the State Pension and the tax-free limit is narrowing quickly(Image: Getty)
Experts have warned that the latest State Pension rise under the Triple Lock could leave more pensioners vulnerable to income tax bills. The Triple Lock guarantee ensures the State Pension increases annually in line with earnings growth, the Consumer Price Index (CPI) inflation rate or 2.5 per cent – whichever is highest.
As reported by the Daily Record, the full New State Pension is now worth £12,547 during the 2026/27 financial year. Yet the uprating leaves just £36 before the Personal Allowance income threshold of £12,570 is exceeded, meaning more pensioners with any additional income will find themselves facing tax bills in retirement.
While the yearly rise has been broadly welcomed following a prolonged period of soaring inflation, the continuing freeze on tax thresholds until April 2031 means the gap between the State Pension and the tax-free limit is narrowing at an alarming rate.
This marks a dramatic change from just a few years back. In the 2021/22 tax year, pensioners could earn more than £3,200 on top of their State Pension before crossing the tax threshold.
Analysis by Vanguard shows the impact is already taking hold. The number of taxpayers aged 66 and over has jumped from 6.7 million in 2021/22 to 8.8m in the last tax year – a surge of nearly 2.1m people.
James Norton, head of retirement and investments at Vanguard, warns that the latest State Pension rise is set to pull even more retirees into the tax net, particularly those with modest private pensions or savings income. He said: “The value of the Triple Lock is clear, with the inflation-busting increase confirmed.
“Our analysis shows that those receiving the full new State Pension are almost £1,300 better off compared to if there was just an inflation link in place.
“But with the Personal Allowance frozen, many pensioners will find they are paying tax for the first time or paying more than expected. A considered approach to retirement income is essential to avoid unnecessary tax.”
It’s important to note that anyone whose sole income is derived from the State Pension will not be liable for income tax. However, the full New State Pension is on course to exceed the Personal Allowance during the 2027/28 financial year.
The UK Government has recently confirmed that new measures will be put in place by HM Revenue and Customs (HMRC) this year to ensure that pensioners – whose only income comes from the State Pension – will not be required to file a Simple Self Assessment tax return should their payment push them beyond the Personal Allowance threshold of £12,570. The issue arises from what is widely known as ‘fiscal drag’, where people end up paying tax not because of rising rates, but because thresholds have stayed frozen while earnings have increased.
Although most retirees benefit from additional income through private or workplace pensions, those relying predominantly on the State Pension may still struggle if even a small portion becomes liable for taxation. With further State Pension increases expected, the pressure caused by frozen tax thresholds looks set to remain a significant worry for pensioners trying to manage their finances.
State Pension and tax
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
Check if you have to pay tax on your pension
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.
