The upcoming state pension increase on April 7 could potentially push more pensioners over the income tax threshold, resulting in a higher number of them paying taxes. The 4.1% rise for the financial year 2025/6 will see the state pension amount increase from £11,502 to £11,973 annually.
However, Labour has announced that the personal allowance for tax, which is the amount one can earn before being liable for taxes, will remain frozen at £12,570 until the beginning of the 2028/29 financial year. This means that any pensioners with an additional income exceeding £1,068 in 2024/5 through employment or other pensions would be subject to taxation. In 2025/6, however, an additional income of over £597 could result in a tax bill, reports the Daily Record.
For the majority, this tax would be automatically deducted via PAYE on employment and tax on private pensions. Those who do not have their tax automatically deducted would receive a tax bill from HMRC the following summer, due by January of the next year.
Currently, nearly 8 million (62%) out of the 12.9 million State Pensioners in the UK are already paying some form of tax during their retirement. A person receiving the full new state pension, without any other income source, would not be liable for income tax.
The launch of auto-enrolment in workplaces, now in its 13th year, means that more individuals will likely enjoy a higher retirement income and as a result will pay tax, typically deducted from their private pension. Any tax owed in retirement is determined based on the amount of income earned above the threshold, not the total additional income. For example, if an individual has a total annual income of £13,000, they would be taxed on £430 – the amount exceeding the £12,570 threshold. This person would then owe HMRC 20% of the £430 (or 19% in Scotland), which is the starter rate of tax.
The Labour Government has pledged to maintain the Triple Lock for the next five years. This guarantees that the New and Basic State Pensions will increase each year by whichever is highest between the average annual earnings growth from May to July (4.1%), CPI in the year to September (1.7%), or 2.5 per cent.
Income rates and tax bands – England
- £12,571 to £50,270 – 20%
- £50,271 to £125,140 – 40%
- over £125,140 – 45%
Income rates and tax bands – Scotland
£12,571 to £14,876 – 19%, Starter rate
£14,877 to £26,561 – 20%, Scottish basic rate
£26,562 to £43,662 – 21%, Intermediate rate
£43,663 to £75,000 – 42%, Higher rate