The Treasury has confirmed that it will increase the state pension by 4.8% for 2026/27 under the earnings trigger of the Triple Lock mechanism.
The full new state pension will rise by 4.8% in line with earnings and by 1% above inflation.
The 2026/27 amount will therefore be £12,547 a year, just £23 under the frozen personal allowance of £12,570. As a result, from 2027/28, even those just on full state pension could face tax demands from HMRC.
The freeze to income tax thresholds will have cost pensioners £41.3 billion by the end of the decade since it was first introduced in 2022/23, analysis commissioned by the Liberal Democrats reveals.
It means that the typical pensioner hit by these freezes will be almost £800 a year worse off by 2029/30 with a tax hike worth £7.4 billion a year by the end of the decade. That is up from £590 million a year in 2022/23, a more than 12-fold increase of £6.8 billion a year in additional tax.
There has been heightened speculation that Rachel Reeves will extend these threshold freezes beyond 2027/28, when they were due to end, in this week's Budget.
Across the 2022/23 - 2029/30 period, it is estimated that the number of pensioners paying income tax will have risen from 5.6 million to 7.6 million, a rise of 37%.
David Brooks, head of policy at independent pensions consultancy Broadstone, said: “Confirmation that the state pension will increase by 4.8% takes the annual benefit right up to the brink of the frozen personal allowance threshold and will drag more retirees into paying income tax next year.
“The outsized increase to the state pension will once more raise questions around the long-term viability of the Triple Lock given the accelerating cost to the Exchequer. With the State Pension Age review ongoing, it will be interesting to see if it makes any proposals beyond raising the age of receipt either higher or faster.
“As we head into Winter with the cost-of-living pressures still biting, the news will be reassuring for those pensioners who are largely reliant on the State Pension to provide the majority of their income.”
Steven Cameron, pensions director at Aegon, commented: “As Budget week kicks off, state pensioners have received welcome confirmation that their state pension will increase in line with the triple lock next April, by an above-inflation increase of 4.8%, bringing the full new state pension up from the current £11,973 a year to £12,547. While this was a Manifesto Commitment, there were real concerns that the Chancellor might have reneged on this, instead focusing on ‘working people’.
“While welcome, the increase does come with a sting in the tail for future years. Under the triple lock, the full state pension will increase by a minimum of 2.5% in future years, meaning in 2027/28 it will be at least £12,861. This is above the personal allowance of £12,570, which is already frozen until April 2028, with speculation of an extended freeze until 2030. This means someone whose sole income is the full new state pension will face a tax charge on the excess, a minimum of £58 a year – something many will see as a case of giving with one hand and taking with the other.
“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.”
