The state pension is set to rise in line with wage growth next year, potentially reaching £12,019 annually from April 6, 2025. This increase is due to the Triple Lock mechanism, which ensures that pensions increase by the highest of wage growth, inflation, or a flat 2.5 percent. While this uplift will keep pensioners below the current income tax threshold of £12,570 for the 2025 tax year, projections suggest that by 2026, another rise of £517 could push the annual state pension to £12,587.
This would mean that even pensioners with no additional income will be required to pay income tax on their state pension for the first time. Under these projections, pensioners would owe 20 percent of every pound above the threshold, marking a significant change in how pensions are taxed. This new tax burden could potentially be mitigated by increasing the Personal Allowance threshold, but the Labour Party has committed to keeping tax thresholds frozen until 2028.
Pensioner tax implications in 2026
While the initial tax amounts would be minimal, the novelty of state pensioners being liable for any income tax at all could lead to significant public debate and political pressure. Experts are urging pensioners to seek additional income sources and savings to ensure financial stability in their later years.
Sarah Coles, head of personal finance at Hargreaves Lansdown, emphasized the importance of supplementing the state pension with personal retirement savings. “The state pension is the backbone of people’s retirement income. But for a decent retirement income, it’s important to supplement it with your own retirement savings, whether that’s through a workplace pension or a Self-Invested Personal Pension (SIPP),” she said.
As the financial landscape evolves, both pensioners and policymakers will need to stay informed and prepared for upcoming changes to ensure the financial well-being of retirees in the UK.
