Millions of people on the New State Pension could see their annual payments exceed the £12,570 tax-free Personal Allowance threshold from April next year if earnings growth determines the Triple Lock uprating.
The latest earnings growth figure of 4.1 per cent (including bonuses) is currently forecast to be the measure used to increase State Pension payments for the 2027/28 financial year. If confirmed, the full New State Pension would rise from £241.30 to around £251.20 each week - equivalent to £1,004.80 every four-week pay period and £13,062.40 over the financial year.
That would put the full annual payment around £492 above the current £12,570 Personal Allowance.
Triple Lock and inflation context
The latest Consumer Prices Index (CPI) inflation rate rose from 2.6 per cent in June to 2.9 per cent in July, according to new figures from the Office for National Statistics (ONS). However, it remains well below the 4.1 per cent earnings growth measure.
The Personal Allowance is the amount of income most people can receive before they start paying Income Tax and is currently frozen at £12,570 until April 2031.
However, it is important to understand that exceeding the threshold would not mean the entire State Pension suddenly becomes subject to tax. Income Tax is based on a person's overall taxable income and individual circumstances, and only income above their available Personal Allowance would normally be liable for tax.
State Pension uprating predictions for 2027/28
State Pension payments rise each April under the Triple Lock by whichever is highest of: average annual earnings growth from May to July, Consumer Prices Index (CPI) inflation in the year to September, or 2.5 per cent.
The latest earnings growth measure is 4.1 per cent, including bonuses, while inflation remains below that level. September's CPI figure still needs to be published before the Triple Lock increase can be determined. If inflation remains below 4.1 per cent, earnings growth would determine the annual increase and take the full New State Pension above the Personal Allowance.
The full Basic State Pension would remain below the threshold. A 4.1 per cent increase would take weekly payments from £184.90 to around £192.50, equivalent to approximately £10,010 over the year.
Chancellor John Healey will confirm the annual uprating at the Autumn Budget next month. An uprating of 4.1 per cent on the current State Pension would see people receive the following amounts.
- Full New State Pension: Weekly: £251.20 (from £241.30); Four-weekly pay period: £1,004.80 (from £965.20); Annual amount: £13,062.40 (from £12,547)
- Full Basic State Pension: Weekly: £192.50 (from £184.90); Four-weekly pay period: £770 (from £739.60); Annual amount: £10,010 (from £9,614)
How State Pension tax is collected
The State Pension counts as taxable income, although it is paid by the Department for Work and Pensions (DWP) without Income Tax being deducted first. HM Revenue and Customs (HMRC) looks at a person's total taxable income to determine whether any tax is due.
This can include: New or Basic State Pension, Additional State Pension, workplace or personal pensions, earnings from employment or self-employment, taxable benefits, and income from savings, investments or property.
The impact of the State Pension rising above the Personal Allowance will depend heavily on what other income a pensioner receives. Someone receiving a workplace or private pension alongside their State Pension, for example, may already have taxable income considerably above £12,570. As the State Pension rises while the Personal Allowance remains frozen, an increasing proportion of other retirement income could also potentially become liable for Income Tax.
Tax is not normally deducted directly from State Pension payments. HMRC recently issued guidance explaining that where someone receives a private pension or has earnings alongside their State Pension, it will normally try to collect any tax due by adjusting the tax code applied to that other income. Where someone receives a State Pension but does not have another source of income through which tax can be collected, HMRC may instead calculate what is owed and issue a Simple Assessment tax bill.
The UK Government has previously pledged that pensioners whose sole income is the State Pension will not be required to pay Income Tax as a result of Triple Lock increases taking payments above the Personal Allowance.
The full New State Pension is currently worth £241.30 each week, equivalent to £12,547.60 over 52 weeks - leaving just over £22 between the full annual payment and the £12,570 Personal Allowance. A 4.1 per cent increase next April would take the annual amount above the threshold.
People can use an online tool on GOV.UK to check whether they may need to pay tax on their pension income. Before using the service, you will need to know whether you receive State Pension or a private pension, how much pension income you expect to receive during the tax year and details of any other taxable income. The checker cannot be used by people who receive foreign income, Marriage Allowance or Blind Person's Allowance.
