State pensioners on £22 tax ‘cliff edge’ after Rachel Reeves budget, say experts | Personal Finance | Finance
Pensioners are set to face a hidden tax squeeze after the Chancellor confirmed a 4.8% rise in the State Pension from next April.
The increase, triggered by the government’s “triple lock,” will lift the full new State Pension to £12,548 a year – just £22 below the current personal allowance, meaning many retirees will soon start paying income tax for the first time.
Experts warn that the freeze on income tax thresholds until 2031 will allow this stealth tax to bite even deeper into pensioners’ incomes.
By April 2027, anyone receiving the full State Pension will cross the income tax threshold, making them liable for tax on money they currently enjoy tax-free.
John Chew, Technical Specialist at Canada Life, said: “The triple lock will trigger a 4.8% rise in the State Pension from April 2026 to £12,548, meaning pensioners will be just £22 away from the income tax cliff edge.
“Those relying on additional income such as private pensions or dividends will see their tax bills rise even further.”
Current HMRC data shows about 8.5 million pensioners already pay income tax. Analysts warn this number will rise — possibly by hundreds of thousands and potentially up to several million — as the full State Pension rise pushes more pensioners above the personal‑allowance threshold.
The Budget confirmed that someone on the full new State Pension will receive £241.30 per week, while those on the full basic State Pension will get £184.90 weekly. However, not all elements of the pension will rise at the full triple lock: elements such as the additional State Pension will only increase with inflation, which came in at 3.8%.
Helen Morrissey, Head of Retirement Analysis at Hargreaves Lansdown, said:
“The freeze on income tax thresholds means it is highly likely that the full new State Pension will breach the threshold for basic rate tax in 2027.
“For those solely reliant on it, this may come as an unexpected shock. The government has said it is looking at ways to ease the administrative burden for retirees whose only income is the State Pension, so they may not have to pay tax via simple assessment.”
The squeeze comes at a time when pensioners are already facing rising living costs. In addition to the stealth tax, dividend tax is set to rise by 2% next April, hitting retirees who supplement their income from investments.
Lucie Spencer, Partner in Financial Planning at wealth management firm Evelyn Partners, pointed out that, currently, only one in three (36%, or 4.7million) pensioners get the full new state pension.
She said: “This means that millions of pensioners will not be receiving the estimated full new SP payout of about £12,540 in 2026/27 which is often portrayed as a headline rate. Generally speaking the older you are the more likely it is your state pension will be less than this, and sometimes substantially so.”
She added: “The personal allowance freeze at £12,570 – which was also extended to 2029/30 today – does mean more state pensions will be taxed and that will accelerate in 2027/28 and subsequent years.
“You won’t find many pensioners complaining about triple lock increases because of this, although plenty would argue that the personal allowance should be raised to remove the anomaly.”
She warned: “What concerns most people is how it will be taxed – at source or will state pensioners have to tackle the quite daunting self-assessment process? Currently the state pension will always be paid gross.
“If the state pension is your only income and exceeds the Personal Allowance, then HMRC will usually issue a Simple Assessment after the tax year ends, telling you how much tax you owe and how to pay it.
“If you have other income not taxed via PAYE (e.g., rental income, or from self-employment), then you may need to complete a self-assessment tax return.”
