The freeze on income tax thresholds and triple lock increase mean state pension will exceed the £12,500 nil rate band by 2027, but a new assessment process means this will not result in a tax charge.
In her Budget speech today, Chancellor Rachel Reeves committed to maintaining the state pension triple lock for the duration of this parliament. In April 2026, the State Pension will be uprated by 4.8 per cent, an additional £575 a year.
From April 2027, the full new state pension will be at least £12,861, exceeding the £12,570 allowance, which would otherwise have triggered a tax charge of at least £58 a year.
But the government will ease the administrative burden for pensioners whose sole income is the basic or new State Pension without any increments so that they do not have to pay small amounts of tax via Simple Assessment from 2027-28. The government says it is exploring the best way to achieve this and will set out more detail next year.
Steven Cameron, Pensions Director at Aegon, says: “Extending the freeze to 2031 is a major blow for taxpayers. It means thresholds will have been fixed for an astonishing nine years, pulling millions more into paying tax, or paying at a higher rate. By stealth, this increases the tax burden albeit without any actual rise in headline rates.
“OBR projections were already predicting that by 2028, millions more would be paying income tax, with significant growth in higher and additional rate taxpayers. The 3-year extension will add further millions to this. For those moving into higher tax bands, paying extra income into a pension could soften the blow by securing 40% tax relief.
“Surprisingly, the Chancellor has said those with only the old or new state pension will not be subject to income tax even if their income exceeds the frozen personal allowance.
“The extended freeze means both the excess and the potential tax bill would have risen annually, which would have been perceived as the government giving with one hand and taking with the other. By 2030/31 the tax bill might have risen to over £500 per year.
“It’s very welcome that the Chancellor has confirmed state pensioners with no other income will not face a tax charge even if their income exceeds the frozen thresholds.”
“This is the inevitable consequence of tax policy that hasn’t kept pace with reality. HMRC simple assessment letters have soared as more retirees unexpectedly face tax bills. In the past, age-related personal allowances helped protect older taxpayers: in 2012–13, those aged 65–74 had an allowance of £10,500, and those 75 and over had £10,660, compared to £8,105 for under-65s. Simplifying to one allowance made sense, but freezing it has created a new mismatch.
“Scrapping these bills will ease confusion, but it doesn’t fix the underlying problem. With the state pension rising 4.8 per cent next April under the triple lock and thresholds frozen, this mismatch will keep growing. This also won’t help pensioners that have only very meagre additional pensions.”
