Warning state pensioners may have to pay tax even if they have no other income

Many pensioners may have to pay Income Tax in the future even if they have no other sources of income, a top pensions expert warns. This is largely due to modifications inthe triple lock system, which boosts the amount received by everyone on the State Pension.

The Government is bound each year to increase the sum it pays out in pensions, thanks to the triple lock. Despite debates over its hefty cost to the state, it remains in place for the foreseeable future, having been enshrined in a Labour manifesto pledge.

This stipulates that State Pension payoutsmust rise in line with one of three measures: wage growth, inflation, or a flat 2.5 percent, whichever is highest, every April. However, Steve Webb, a partner at pensions firm LCP, has suggested that the State Pension is set to exceed the Personal Allowance Income Tax threshold from April 2027.

The shift is anticipated to come into effect on April 6, marking the start of the new tax year. Consequently, the Express reports that even if a pensioner with no other income receives the benefit, HMRC might still tax part of their State Pension.

Currently, the State Pension disburses a total of £11,973 annually to those on the full new State Pension who have a complete National Insurance record of qualifying years (typically around 35 years).

Meanwhile, the current Income Tax Personal Allowance threshold sits at £12,570, which means State Pensioners without any other income will narrowly avoid the Income Tax threshold in 2025-2026 by just £597.

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Pensioners already face Income Tax obligations, but generally require extra income on top of the State Pension to surpass the tax-free limit. At present, nobody relying solely on State Pension payments would face tax on them - though this could alter in years to come.

Steve Webb explained to the Express: "This is because the triple lock formula provides a floor of 2.5% increases, meaning the rate will rise at least £236 in April 2026 and £241.90 in April 2027. The April 2027 rate is £12,578 per year, just above the £12,570 tax threshold.

"This could mean hundreds of thousands of pensioners are taxed on just £8 per year, with a tax bill of £1.60. If tax-free personal allowance then rises by CPI but the State Pension rises by more, then this situation will continue indefinitely.

"A combination of an increasing State Pension and frozen tax thresholds means we will soon be in the nonsensical situation where the new State Pension will be just a few pounds above the income tax threshold. This means that people whose only income is the standard new State Pension will be dragged into income tax. Long gone are the days when retirement meant no longer having to deal with the tax office."

Despite the incredibly low tax - potentially as little as £8 - any change would still signify a tax imposition by HMRC, and the amount would rise annually unless there are changes to the Government thresholds.

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One possible solution could be to increase the Personal Allowance threshold, which has been unchanged for years. However, Labour has pledged to keep tax thresholds frozen until 2028 - a position it may need to reassess sooner if it wants to avoid headlines about taxing all pensioners.

Have you got a story to share? Get in touch at lauren.haughey@reachplc.com

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