Starting April 2025, an estimated 650,000 additional retirees will begin paying income tax on their state pension due to the latest increase in payments. The full new state pension now stands at £11,973 per year, edging closer to the frozen personal allowance of £12,570. This narrow gap means more pensioners will be pushed over the tax threshold without any changes in tax policy.
Pension Rises vs. Frozen Allowances: A Growing Imbalance
Under the triple lock mechanism, the state pension increases annually by the highest of inflation, wage growth, or 2.5%. In April 2025, this resulted in a 4.1% increase. However, the personal tax-free allowance has remained static at £12,570 since the Conservative government froze thresholds until the 2027-28 fiscal year. Labour Chancellor Rachel Reeves has upheld this freeze, intensifying the effect.
This mismatch between rising pension income and stagnant tax thresholds has already pulled over 2.6 million retirees into the tax bracket. In just two years, this number has jumped by 2.5 million—and is expected to keep growing.
Table: Key State Pension and Tax Figures (2023-2026 Forecast)
| Year | Full New State Pension | Personal Allowance | Increase in Pensioners Paying Tax |
|---|---|---|---|
| 2023-24 | £10,600 | £12,570 | 2.1 million |
| 2024-25 | £11,502 | £12,570 | 2.6 million |
| 2025-26 | £11,973 | £12,570 | +650,000 (projected) |
| 2026-27* | £12,523* | £12,570 | Even more retirees affected |
*Projected based on OBR forecast of 4.6% triple lock rise.
Retirees Facing Higher Tax Burdens
Separate analysis shows that before April 2025, approximately 249,000 pensioners were already paying over £1,000 annually in income tax on their state pension alone. Of these, more than 10,000 were paying more than £2,000. As pension payments increase but tax thresholds stay the same, these figures are expected to worsen.
The state pension now supports nearly 13 million people across the UK. Around 4.2 million of these receive the full “new” state pension introduced in 2016, while the rest remain on the “basic” state pension, which now totals £9,175 annually.
The Long-Term Impact of Frozen Tax Policy
Experts warn that if this trend continues, retirees will increasingly find themselves paying income tax simply for receiving the state pension they’ve been promised.
Sir Steve Webb, former Pensions Minister and current partner at LCP, highlights how the combination of a frozen allowance and rising pension values has shifted the tax burden. “The total increase from April 2023 to 2025 is nearly 25% in state pension value, while the personal allowance hasn’t changed at all. This dynamic is changing retirement tax expectations dramatically,” Webb said.
Jon Greer from Quilter added, “The margin between the pension income and the tax-free threshold is shrinking fast. If projections hold, by April 2026, the full new state pension could rise to £12,523—leaving pensioners with less than £50 buffer before hitting the taxable income line.”
Treasury’s Position on the Issue
A Treasury spokesperson commented, “Our goal is to support pensioners and maintain their dignity in retirement. That’s why we increased the state pension and froze fuel duty, giving couples up to £88 more per month.”
However, critics argue this additional income may be offset by unexpected tax liabilities.
Conclusion
As the UK enters the 2025-26 tax year, many retirees who once fell below the tax threshold now find themselves paying income tax on what was long considered non-taxable retirement income. With further increases projected and tax bands remaining frozen, more pensioners will need to prepare for rising tax obligations.
Financial planning is essential. Retirees should consider advice from tax professionals to manage their income effectively, especially as these changes impact household budgets and savings strategies.
FAQs
Why are more pensioners paying income tax in 2025?
The state pension has risen to £11,973 in April 2025, nearing the personal tax allowance of £12,570, which has been frozen until 2027-28. This causes more retirees to cross the income threshold and become taxable.
What is the triple lock and how does it affect pensions?
The triple lock guarantees the state pension increases annually by the highest of inflation, average wage growth, or 2.5%. This ensures consistent growth but can lead to higher tax bills if tax thresholds remain unchanged.
Will the personal tax allowance increase soon?
As of April 2025, there are no confirmed plans to raise the personal tax allowance before the 2027-28 tax year, meaning more pensioners could face tax burdens if the freeze continues.
How can pensioners reduce their tax liability?
Options include income-splitting between spouses, tax-efficient savings vehicles like ISAs, and delaying private pension withdrawals. Consulting a financial advisor can help create a tailored plan.
Who qualifies for the full new state pension?
Individuals who reached state pension age after April 6, 2016, and have 35 qualifying years of National Insurance contributions, are eligible for the full new state pension.
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