State Pensioners Urged to Check for 'Subtle' Tax Change as Payments Rise
State pensioners across the United Kingdom are being advised to remain vigilant regarding potential tax implications following the upcoming increase in their payments this April. The triple lock mechanism guarantees that state pension payouts will rise in accordance with the highest of three benchmarks: average earnings growth, inflation levels, or a baseline 2.5 per cent. This year, the increase is driven by last year's earnings figure, resulting in a 4.8 per cent uplift.
Significant Payment Increases Expected
The full new state pension will climb from its current weekly rate of £230.25 to £241.30, while the full basic state pension will rise from £176.45 weekly to £184.90. On an annual basis, the new state pension will reach approximately £12,548. Jennifer Critchton, a senior wealth planner at Killik & Co, has issued a warning that this income boost could inadvertently pull many recipients into higher tax brackets.
"This brings many pensioners above the personal allowance (£12,570) once any private pension or other income is taken into account," explained Ms Critchton. She emphasized that the triple lock policy means the full new state pension will certainly exceed the personal allowance threshold from April 2027 onwards.
Government Policy and Fiscal Drag Concerns
Labour ministers have previously stated that individuals whose sole income is the state pension, without supplementary payments, would not be required to pay small income tax amounts when their earnings surpass the personal allowance. However, the Government has yet to provide detailed operational guidelines for this exemption.
Ms Critchton highlighted the ongoing freeze on income tax thresholds, a policy adopted by both the current and previous Governments. "The continued freeze on income tax thresholds is a subtle but increasingly significant form of fiscal drag, and its effects are beginning to be felt," she remarked. With the personal allowance remaining static, the triple lock increases are expected to push many pensioners over the tax-free threshold solely from state pension income by the 2027/28 tax year.
Financial Planning Recommendations
For pensioners who do not immediately need the additional funds from this year's state pension increase, Ms Critchton offered practical advice. "Using it to rebuild an (interest-earning) easy access cash buffer or saving into an ISA can help keep money flexible for later-life expenses such as home adaptations or care costs," she suggested.
Future of the Triple Lock and Policy Changes
As the triple lock continues to escalate the state pension bill for the Government, questions are being raised about its sustainability. Ms Critchton noted, "Over time, it's likely the triple lock will be revisited because it's simply too expensive to sustain." She proposed that a new system, potentially using multi-year averages or removing the 2.5 per cent floor, might be considered to smooth out volatility during periods of high inflation or earnings growth.
In addition to tax changes, key policy shifts on the horizon include:
- The state pension age will gradually increase from 66 to 67 by April 2028, starting this April.
- Legislation has been established for a further increase to 68 between 2044 and 2046.
- Labour announced in 2025 that another review of the state pension age will be conducted, following a 2023 review that suggested an earlier shift to 68, which was not adopted by the Conservative Government at the time.
Pensioners are encouraged to stay informed about these developments and consult financial advisors to navigate the evolving landscape of state pension and taxation policies effectively.
