Pensioners' tax fears as allowance to remain frozen until 2028

Chancellor Rachel Reeves has unveiled a boost for millions of pensioners, with weekly State Pension payments set to increase by 4.1% next year, underpinned by the earnings growth measure of the Triple Lock policy. In addition, she disclosed that the Personal Allowance will be maintained at £12,570 until 2028.

Presently, about 64% of older people, equating to 8.1 million retirees, are subject to tax on their retirement income, which is often due to additional funds from workplace or private pensions supplementing their State Pension. Despite the conclusion of the freeze in 2028, an individual receiving the full New State Pension during the financial year 2025/26 will get £11,975.60, leaving a margin of just £595 - approximately £50 per month - before they hit the £12,570 personal tax allowance limit.

Post-Budget, Lee Anderson (Reform UK) queried the Chancellor through a written question about the possibility of a higher tax threshold for those above the State Pension age. Treasury Minister James Murray responded on November 1, affirming: "The Government is committed to making sure older people can live with the dignity and respect they deserve in retirement. The income tax Personal Allowance will continue to exceed the basic and full new State Pension in 2024-25."

He further clarified: "This means that pensioners whose sole income is the full New State Pension or Basic State Pension without any increments will continue to not pay any income tax."

Retirement specialists at Spencer Churchill have estimated that around 900,000 more people will exceed the Personal Allowance threshold of £12,570 during the current financial year (2024/25). The full New State Pension is set to rise from £221.20 to £230.30 per week, which equates to £921.20 every four weeks, reports .

This means that annual payments will increase from £11,502 to £11,975.60 over the 2025/26 financial year. Similarly, those on the full Basic State Pension will see their weekly payments go up from £169.50 to £176.45, or £705.80 every four-week payment period.

This will result in annual payments rising to £9,175.40 over the 2025/26 financial year. It's important to remember that additional State Pension elements, including deferred State Pensions, will increase by the September CPI figure of 1.7 per cent.

The Treasury Minister has also confirmed that older people whose only income is the State Pension will not be taxed. Those with additional income who do not pay HM Revenue and Customs (HMRC) directly through earnings or pensions, will not receive a tax bill until June or July 2025, which must be paid by the end of January 2026.

The current full New State Pension is valued at £11,502 this year. This leaves a mere £1,068 before the personal tax threshold is breached.

Therefore, anyone with an additional income of £89 or more per month - on top of their State Pension - could face a tax bill next year. When the annual sum increases to £11,975.60 next year, this leaves just £595 - roughly £50 per month - before the £12,570 personal allowance is exceeded.

Someone receiving the full rate of the Basic State Pension currently gets £8,814, leaving just £3,756 before the personal tax threshold is reached, equivalent to an additional income totalling £313 per month. Over the 2025/26 financial year, this will rise to £9,175, leaving £3,395 before the personal tax allowance has been used - an extra £283 each month.