Nearly one million State Pensioners set to pay tax in retirement after the Autumn Budget

Linda Howard
·4-min read

The Chancellor Rachel Reeves has announced that millions of older people on the State Pension will see their weekly payments increase by 4.1 per cent next year under the Triple Lock policy. The Autumn Budget on Wednesday confirmed the annual uprating will be determined by the earnings growth figure of 4.1 per cent.

Under the Triple Lock, the New and Basic State Pensions increase each year in-line with whichever is the highest between the average annual earnings growth from May to July (4.1%), Consumer Price Index (CPI) in the year to September (1.7%), or 2.5 per cent.

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This means that people on the full New State Pension will see payments rise from £221.20 to £230.30 each week and as the payment is typically made every four weeks this amounts to £921.20. This will see annual payments rise from £11,502 to £11,975.60 over the 2025/26 financial year.

Similarly, someone on the full Basic State Pension will see weekly payments rise from £169.50 to £176.45, or £705.80 every four-week payment period. Annual payments will rise to £9,175.40 over the 2025/26 financial year.

It's important to be aware that additional State Pension elements, including deferred State Pensions, will rise by the September CPI figure of 1.7 per cent.

While these increases will be welcomed by pensioners across the country, the annual payments also push more older people towards the Personal Tax aAllowance threshold of £12,570.

The Personal Allowance will remain frozen at £12,570 until 2028. Some 8.1million (64%) older people currently pay tax in retirement, largely due to additional income from workplace or private pensions on top of their State Pension.

Retirement experts at Spencer Churchill predict around 900,000 more people will exceed the Personal Allowance threshold of £12,570 over the current financial year (2024/25).

It’s important to be aware that older people whose sole income this year is the State Pension will not pay tax, and anyone with additional income who does not pay HM Revenue and Customs (HMRC) directly through earnings, will not receive a tax bill until June or July 2025, which must be paid by the end of January 2026.

The current, full New State Pension is worth £11,502 this year, this leaves just £1,068 before the personal tax threshold is exceeded, so anyone with additional income of £89 or more per month - on top of State Pension - may receive a tax bill next year.

Next year, when the annual sum rises to £11,975.60, this leaves just £595 - some £50 per month - before the £12,570 personal allowance is exceeded.

Someone on the full rate of the Basic State Pension currently receives £8,814, leaving just £3,756 before the personal tax threshold is exceeded, equivalent to additional income totalling £313 per month.

Over the 2025/26 financial year this will rise to ££9,175, leaving £3,395 before the personal tax allowance has been used - £283 extra each month.

Retirement expert Adam Pope from Spencer Churchill Claims Advice has warned that nearly two million people over State Pension age will feel the financial impact of the freeze on the Personal Allowance within the next four years.

He said that some 8.1m (64%) currently pay tax in retirement, largely due to additional income from workplace or private pensions on top of their State Pension.

Spencer Churchill predicts a further 2m people in receipt of the State Pension will see their income exceed the Personal Allowance before the freeze ends in 2028.

Adam explained: “Freezing income tax thresholds for pensioners is worrying and could really affect their financial situation. Almost two million pensioners are expected to be hit by this in the next four years, meaning many of them will have to pay more tax.

“This is especially tough for those mainly living off the State Pension. With no change in the tax thresholds, they could find themselves owing more tax than they expected, making things hard if they don’t have much to begin with.”

The pensions expert continued: “As the State Pension amount goes up, more pensioners could have to pay more tax, making life harder for those already struggling. Over 60 per cent of pensioners are paying income tax, up from about 50 per cent in 2010.

“What’s more, keeping income tax thresholds the same could mean pensioners have less money to spend. By 2027/28, the average tax-paying pensioner could be £1,000 worse off which could really affect their living standards and financial safety.”

Chancellor Rachel Reeves will confirm the new State Pension and benefits rates during the Autumn Budget on October 30.

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