The new state pension will be worth £12,548 a year from April 2026, just below the £12,570 allowance, which is the amount of income individuals can earn before paying tax. The allowance is currently frozen until at least 2028.
By April 2027, the full state pension is expected to exceed the allowance due to the triple lock, which increases payments in line with inflation, average wage growth, or 2.5 per cent, whichever is higher. This could mean that even pensioners whose sole income is the state pension may need to complete a self-assessment tax return as part of the Treasury’s Making Tax Digital initiative.
Dennis Reed, from the over-60s charity Silver Voices, expressed concern about the potential impact on older people. He said: “I am concerned about the administrative burden on vulnerable pensioners who may worry about their tax liability and feel anxious about filling out online forms if they are not online themselves. Older people in particular do not like to be in debt, it is not a way they are used to living.”
More than 13 million people receive the state pension, with 4.3 million getting the new state pension, which is available to those who reached retirement age after 2016. Around 56 per cent receive the full amount, currently £230.25 a week, according to retirement specialist Just Group.
The previous Conservative government pledged to raise the personal allowance for pensioners by 2.5 per cent to prevent a “retirement tax” on those whose only income is the state pension. However, the chancellor is reportedly considering lowering income tax thresholds or extending the freeze on existing thresholds until 2030 to raise more revenue through fiscal drag.
Experts warn that this could lead to millions more pensioners paying tax. At present, the state pension is paid by the Department for Work and Pensions without tax being deducted. Pensioners with other sources of income, such as workplace pensions, typically pay tax through PAYE, deducted at source.
Once the state pension exceeds the personal allowance, even pensioners without other income may face a tax liability. HMRC has not yet specified how it would collect this tax. Experts suggest options include asking pensioners to complete a self-assessment tax return or implementing a PAYE system for the state pension, though the latter could cost over £100 million, according to analysis from the now-disbanded Office for Tax Simplification. Another option is for HMRC to send pensioners a bill outlining the tax owed for the year, which could create unexpected cashflow problems.
Mike Ambery, from pension firm Standard Life, said: “Without a policy shift, such as a triple lock plus that raises tax thresholds in line with state pension increases, many retirees could face paying tax on the state pension alone. This risks disincentivising even modest private saving because small amounts of additional pension income would immediately become taxable.”
He added that HMRC would likely rely on tax code adjustments and simple assessments, where the tax owed is calculated and a bill is sent after the tax year ends, to avoid millions of new self-assessment returns.
An HMRC spokesperson said: “No one has to file a tax return simply because the state pension takes them over the personal allowance. Existing self-assessment customers pay any additional tax owed on the old state pension through self-assessment. Those who are employed or receive a private pension usually pay any additional tax via PAYE. Anyone else affected may be issued a simple assessment.”
