State pension up 4.8% perilously close to threshold

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

Chancellor confirms state pension to rise by 4.8% in line with earnings and well above inflation, putting pensioners within £23 of tax threshold.

This means the full state pension, which it should be noted is not paid to all pensioners due to various changes over the years, will amount to £12,547 a year from April 2026 due to triple lock, up from the current £11,973 a year.

This brings it dangerously close to the basic rate threshold of £12,570, which has been frozen since 2021. There will only be a £23 cushion before income tax kicks in, inevitable the next time the rate goes up.

With Rachel Reeves claiming a £30bn fiscal black hole, all the talk is she plans to extend the freeze on thresholds to 2029-30, leaving HMRC with a massive problem to consider how it will collect tax from every pensioner in receipt of the full state pension, surely without forcing them all to complete a self assessment tax return every year.

From 2027-28, even those just on full state pension will face tax liability with HMRC facing a whole new tranche of taxpayers to collect from, unless the government introduces taxation at source from the state pension.

Steven Cameron, pensions director at Aegon, said: ‘Currently, there is no facility to deduct tax direct from state pensions, with income tax on overall retirement incomes being deducted from private and workplace pensions.

‘So those with solely a state pension could face receiving letters from the taxman demanding they pay the tax due. While of modest amounts, this could create anxiety amongst many vulnerable pensioners.

‘Clearly, there’s also a cost of sending out tax demands and administering payments, and this could wipe out much of the increased tax due, which might justify waiving particularly small tax bills. However, if the Budget includes an extended personal allowance freeze, the amounts due will rise year on year making any waiver increasingly unlikely.

‘We urge the government to be clear with affected state pensioners if they can expect to receive tax bills in future years.’