State pension teeters on £12.5k tax threshold

Sara White, Editor, Business & Accountancy Daily - Croner-i

The annual state pension is likely to rise by 4.7% next year under triple lock rules bringing pensioners within £35 of basic rate tax threshold.

The rise is down to the triple lock which means the state pension is tied to the highest of average earnings growth, inflation or 2.5%. The latest ONS figures showed 4.7% earnings growth including bonuses for May to July 2025.

The government has not yet confirmed the 2026-27 increase for pensioners, but this is usually confirmed in the autumn and it is committed to maintaining the triple lock.

A 4.7% increase would see the ‘new’ state pension rise to £12,534.60 a year, just below the frozen basic rate tax threshold of £12,570, meaning millions of pensioners will be perilously close to paying tax assuming they have no other earnings.

Those earning the old state pension would not be affected as their base pension is so much lower at £9,607 per year.

Nigel Green, chief executive of global financial advisory deVere Group, warns that the headline increase masks a serious problem. 

 ‘The state pension is now almost level with the personal allowance,’ he said. ‘Any private pension income, savings interest or taxable benefits will push people over the threshold. Many who have never paid tax in retirement will soon find themselves in HMRC’s sights.’

With the allowance frozen until at least 2028-29, the triple lock is creating a tax nightmare. Before the general election, the Conservatives said they would introduce a special tax threshold for pensioners, but the current chancellor Rachel Reeves has never addressed the potential problem. 

HMRC figures already show about 8.5m pensioners pay income tax, up from 7.8m just a year ago. 

Green warned: ‘If nothing changes, the state pension will overtake the personal allowance entirely within a few years. That would make every pound of additional income taxable for millions.’

The tax problem raises further questions about the long-term sustainability of the pension triple lock, long criticised as a distorted measure and more of a politically driven factor to draw in pension age voters. With the Labour government’s removal of the winter fuel allowance for the majority last winter, albeit the chancellor u-turned on the policy, it will be interesting to see whether there are any moves to address this issue before next year’s Budget.

in March, the Office for Budget Responsibility (OBR) projected that the state pension budget will rise to £182bn billion by tax year 2029-30.

Rachel Vahey, head of public policy at AJ Bell, said: ‘This poses a significant conundrum for Rachel Reeves and the Treasury. If the triple lock sees the state pension increase above the personal allowance for the first time, then the government will come under increasing pressure to make a decision regarding either the personal allowance or whether it can sustain the triple lock.

‘Removing the freeze on the personal allowance would come at significant cost to the Treasury at a time when the chancellor’s fiscal headroom is already strained at best, while an overhaul of the triple lock would come with huge political risk before the next general election.’

The state pension age will gradually increase to age 67 between 2026 and 2028, and it is due to rise to 68 in the mid-2040s, although this could be brought forward to the 2030s.