One million pensioners to pay higher rate of income tax in retirement this year

The Personal Allowance will be frozen at £12,570 until April 2028.

The latest figures from the Department for Work and Pensions (DWP) show there are now 13 million people of State Pension age across Great Britain. The current official age of retirement is 66 and set to rise to 67 between 2027 and 2028.

The UK Government recently confirmed that an estimated 8.51 million people of State Pension age paid income tax in the last financial year and as the Personal Allowance will remain frozen at £12,570 until April 2028, more pensioners are set to pay tax on their retirement income.

Charlene Young, senior pensions and savings expert at AJ Bell, warns that over one million pensioners are set to pay the higher tax rate of either 40 per cent (£50,271 to £125,140) for those living in England or Wales and 42 per cent (£43,663 to £75,000) for those in Scotland.

READ MORE: State Pension payments could rise by over £550 next year under the Triple LockREAD MORE: New call to scrap National Insurance deductions and increase the number of tax bands

The senior pensions and savings expert at AJ Bell, said: “The nation has fallen victim to the effects of fiscal drag in recent years. Frozen allowances and tax thresholds have pulled more people into the tax system for the first time and hiked the rates of tax people pay as their income rises and they breach a new tax band.

“Pensioners are not shielded from it either – over one million people above state pension age will breach the higher rate 40 per cent threshold this tax year, more than double the number there were when the big freeze began.”

Ms Young continued: “The UK Government is in a straitjacket thanks to its own fiscal rules, and these figures will bolster the arguments of those calling for state pension reform. The full ‘new’ State Pension is close to breaching the tax-free Personal Allowance, and many pensioners already receive well above this thanks to the way benefits could be built up under the old system.

“The Labour Party has repeatedly pledged to protect the Triple Lock guarantee and has paused further hikes to the State Pension age beyond those due to start in 2026.

“But with pensioner spending predicted to top 50 per cent of the welfare bill by the end of the decade, and the rise in State Pension age from 66 to 67 set to save £10 billion in borrowing, can it really continue to ignore calls for further reform?”

The UK Government has confirmed it will honour the Triple Lock policy during this parliamentary term. However, this could see everyone on the full, New State Pension pushed over the tax threshold in just two years’ time.

Under the Triple Lock policy, the New and Basic State Pensions increase each year in-line with whichever is the highest between the average annual earnings growth from May to July, CPI in the year to September, or 2.5 per cent. It is aimed at preventing the value of the State Pensions being whittled away by cost of living pressures.

The New and Basic State Pensions increased by 4.1 per cent in April, however, future forecasts from the Labour Government expect it to rise by 2.5 per cent over the next four financial years. Using these calculations, it puts the full New State Pension on track to be worth £12,578.80 in the 2027/28 financial year – £78.80 over the Personal Allowance.

While the amount of State Pension to be taxed may seem relatively small – tax is only paid on the amount over the Personal Allowance – older people with other income streams could find themselves having to part with more cash to pay a tax bill – if it’s not automatically deducted from private or workplace pensions through PAYE.

Online guidance at GOV.UK on who might need to pay tax on their pension also includes a handy tool to calculate how much tax someone might need to pay, and the different ways this can be done.

The latest State Pension Triple Lock predictions show the following projected annual increases:

2025/26 – 4.1% (forecast was 4%)2026/27 – 2.5%2027/28 – 2.5%2028/29 – 2.5%2029/30 – 2.5%State Pension payments 2025/26

Full New State Pension

Weekly payment: £230.25Four-weekly payment: £921Annual amount: £11,973

Full Basic State Pension

Weekly payment: £176.45Four-weekly payment: £705.80Annual amount: £9,175Future new State Pension forecasts

Under a 2.5 per cent increase, the full New State Pension will be worth:

2026/27 – £236 per week, £12,227.30 a year2027/28 – £241.90 per week, £12,578.80 a yearWhat is taxed

Guidance on GOV.UK states: “You pay tax if your total annual income adds up to more than your Personal Allowance. Find out about your Personal Allowance and Income Tax rates.

Your total income could include:

the State Pension you get – Basic or New State PensionAdditional State Pensiona private pension (workplace or personal) – you can take some of this tax-freeearnings from employment or self-employmentany taxable benefits you getany other income, such as money from investments, property or savingsCheck if you have to pay tax on your pension

Before you can check, you will need to know:

if you have a State Pension or a private pensionhow much State Pension and private pension income you will get this tax year (April 6 to April 5)the amount of any other taxable income you’ll get this tax year (for example, from employment or state benefits)

You cannot use this tool if you get:

any foreign incomeMarriage AllowanceBlind Person’s Allowance

Use this online tool at GOV.UK to check if you have to pay tax on your pension.

The full guide to tax when you get a pension can be found on GOV.UK here.

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