Pensioners could soon face a tax bill on their state pension for the first time as forecasts show it will come within pennies of the personal allowance threshold.
By April 2026, the full new state pension is projected to reach £240.90 per week, making the annual amount just 15p below the tax-free threshold of £12,570.
The following year, in 2027/28, the pension is forecast to exceed this threshold by £315.50, creating what experts are calling a “bizarre tax cliff edge” for retirees.
The figures show a steady progression towards this tax threshold over the coming years.
In the current 2024/25 tax year, the full new state pension stands at £221.20 weekly, totalling £11,541.90 annually – still £1,028.10 below the personal allowance.
By 2025/26, this gap narrows significantly to £553.25 as the pension rises to £230.30 per week.
The critical point comes in 2026/27 when the annual pension reaches £12,569.85, just 15p shy of the £12,570 threshold.
Jon Greer, head of retirement policy at Quilter, commented on this situation: “What was intended as a mechanism to protect pensioners from poverty is now colliding with fiscal drag.”
“This situation is the result of the triple lock producing some significant increases in the state pension due to high inflation and earning figures while the Government has failed to uprate tax thresholds in tandem.”
He noted that the UK is “potentially only one year away from pensioners having to effectively hand a portion of their state pension back to the Exchequer in tax, which to many would seem perverse.”
Greer suggests potential reforms to the triple lock could include linking increases to earnings, with temporary CPI indexation when inflation exceeds wage growth.
This approach would help “align pension growth with the wider economy and create a more predictable and affordable system.”
Chancellor Reeves has committed to keeping allowances frozen until 2028 but could address this issue in the Autumn Statement.
Any changes would need careful consideration as the state pension represents “the single largest area of welfare spending and a vital source of income for millions”.
If the Government doesn’t adjust the personal allowance before 2027/28, millions of pensioners could face income tax on their state pension for the first time.
This would create an unusual situation where a benefit designed to provide basic retirement income becomes partially taxable.
The forecasts highlight the growing tension between the triple lock protection for pensions and frozen tax thresholds.
Without intervention, this could represent a stealth tax on retirees who rely solely on their state pension, potentially undermining the purpose of recent pension increases.