In a significant announcement for millions of retirees, Chancellor Rachel Reeves has provided crucial clarity on the future of the state pension and its tax status. The confirmation came during the recent Budget and was later reinforced in an interview with consumer champion Martin Lewis.
The State Pension Increase Explained
The Chancellor officially confirmed that the state pension will rise by 4.8% from April 2026. This means the full new state pension will increase from its current rate of £230.25 per week to £241.30 per week. Over a full year, this amounts to £12,547.60.
This increase is dictated by the triple lock mechanism, a government guarantee ensuring the state pension grows by the highest of three figures: earnings growth, inflation, or 2.5%. The 4.8% figure was determined by wage growth recorded between May and July.
Tax Implications for Pensioners
The new annual amount places the state pension just below the current personal tax allowance of £12,570. This is the threshold at which individuals start paying income tax. This narrow margin had sparked concerns that future increases could push pensioners whose sole income is the state pension into paying tax for the first time.
However, Chancellor Reeves offered direct reassurance. When questioned by Martin Lewis on whether these pensioners would face a tax bill, she stated unequivocally: "In this Parliament they won't have to pay the tax."
She added that while she could not make commitments beyond the current parliamentary term, the government is actively seeking a "simple workaround" to prevent the issue. This clarification expands on her Budget statement that people receiving only the basic or new state pension would not have to "pay small amounts of tax through Simple Assessment".
Looking Ahead: The 2027 Question
Despite the temporary reprieve, analysts warn that the underlying issue remains. As Martin Lewis highlighted on social media platform X, from 2027, the full new state pension is projected to exceed the tax-free allowance, which would technically make tax due under current rules.
The Chancellor's commitment, however, shields millions of pensioners from this outcome for the duration of the current Parliament. The government's next steps and the nature of the proposed "workaround" for the longer term are now subjects of intense speculation and interest for retirees across the country.
