People who deferred their State Pension to boost their retirement income could miss out on planned protection designed to prevent those relying solely on the benefit from facing an Income Tax bill.
Concerns have been raised over UK Government plans to protect people whose only income is the basic or new State Pension from paying small amounts of tax as payments rise under the Triple Lock. However, the Treasury has repeatedly specified that the protection will apply to people receiving the basic or new State Pension “without any increments”.
That wording has prompted concerns over people who previously chose to defer claiming their State Pension in return for higher payments later.
What has the UK Government announced?
The issue stems from plans announced at the 2025 Autumn Budget as rising State Pension payments move closer to the frozen Personal Allowance.
The Personal Allowance is currently £12,570 and represents the amount most people can receive before becoming liable for Income Tax.
Under the plans, the UK Government intends to prevent pensioners whose sole income is the Basic or New State Pension without increments from having to pay small amounts of tax through Simple Assessment from 2027/28 if State Pension payments exceed the Personal Allowance.
The Budget said the UK Government was exploring the best way of achieving this and would provide further details.
Treasury and Pensions Minister Torsten Bell subsequently told MPs: “I can confirm that those whose sole income is the basic and full new State Pension, without any increments, will not pay any income tax this tax year or next.”
He added that the UK Government had said those whose only income was the Basic or New State Pension without increments would not pay Income Tax over this Parliament.
Why could deferring the State Pension matter?
People do not have to claim their State Pension as soon as they reach State Pension age.
Someone who delays claiming can potentially receive higher regular State Pension payments when they eventually start taking it.
These additional amounts are known as increments, which has raised the question of whether people receiving them will fall outside the planned tax protection.
Former Pensions Minister Sir Steve Webb, who is now a partner at pension consultants LCP, has warned that, as the proposals currently stand, people receiving increments because they deferred their pension appear likely to miss out.
He said the issue could also affect decisions people have already made about their retirement finances. He said someone who had deferred their State Pension “might have made a different decision” if they had known that people without increments could subsequently receive special tax treatment.
He has also warned that the difference could potentially amount to hundreds of pounds a year as the policy progresses.
How does State Pension deferral work?
People who reach State Pension age do not normally need to do anything if they want to defer their payments.
The rules governing how much extra someone can receive depend partly on when they reached State Pension age.
For people reaching State Pension age on or after April 6, 2016, delaying a claim for at least nine weeks can increase the amount eventually received. Different rules apply to people who reached State Pension age before April 6, 2016.
The extra State Pension generated by deferral is taxable income.
It’s important to be aware that the UK Government has not yet published the final details of how its proposed protection for people living solely on the State Pension will work. That means it cannot yet be said definitively that everyone receiving State Pension increments from deferral will be excluded.
During consideration of the Finance Bill earlier this year, Treasury Minister Dan Tomlinson told MPs it would be premature to assess the effects because the detailed policy had not yet been announced.
Lily Megson-Harvey, Policy Director at My Pension Expert, said: “The suggestion that people who deferred their State Pension could miss out on the planned tax exemption raises a serious fairness concern.
“Deferral has long been presented as a legitimate way to boost State Pension income later in life. If that decision now leaves someone facing tax even where the State Pension is their only income, it risks penalising people for planning effectively.
“Government needs to provide urgent clarity on who qualifies and whether the current approach creates unintended cliff edges for those who deferred.”
My Pension Expert is now calling for those details to clarify the position of people who deferred.
Ms Megson-Harvey added: “As pension and tax rules become increasingly intertwined, better access to regulated financial advice, and clear communications, are vital in helping people understand the consequences before they act.”
