State pensioners to pay over £60 in income tax by 2027

Millions of retirees in the UK will be paying £60 in income tax on their state pension in just two years time, new forecasts have revealed.

The state pension is expected to rise by 4.6 per cent in April 2026 under the triple lock pledge, according to predictions from the Office for Budget Responsibility (OBR), after rising by 4.1 per cent next month.

While the increase would benefit pensioners, it will also push the state pension to a level where it exceeds the frozen personal allowance of £12,570 for the first time, triggering income tax liabilities for retirees who previously had no tax obligations.

Jon Greer, head of retirement policy at Quilter, said: “The OBR’s latest forecasts confirm we are fast approaching a bizarre tax cliff edge for pensioners.

“With the state pension forecast to rise by 4.6 per cent in April 2026 under the triple lock, it will land just below the frozen personal allowance.

“That leaves the UK potentially only one year away from pensioners having to effectively hand a portion of their state pension back to the Exchequer in tax, which to many would seem perverse.”

The triple lock is a system that guarantees state pensions increase in line with the highest of inflation, earnings, or 2.5 per cent.

As wage growth is expected to be the highest of these next April, at 4.6 per cent, that is how much it is predicted to grow.

The policy has been under intense scrutiny lately due to the cost of the policy.

It has led to an extra £11bn being spent on the state pension per year, a report by the Institute for Fiscal Studies (IFS) found.

However, the long-standing Conservative policy could cost between an extra £5bn and £45bn a year by 2050, it added, due to the uncertainty created by the terms of the pledge – making it difficult for the public or Government to plan for the future.

The personal allowance – the threshold below which no income tax is paid – has been frozen for years and will remain so until April 2028 at least.

By the time the new state pension, currently worth £221.20 per week, reaches the predicted level of £240.90 per week in 2026-27, it will be just 15p below the personal allowance threshold.

The following year, the state pension will exceed the threshold, reaching £246.95 per week, a level that will push the benefit more than £315.50 above the income tax threshold for the first time.

For a basic rate taxpayer, this means paying 20 per cent of that total as tax, which equates to £63.

For pensioners living solely on the state pension, this could result in them owing taxes, even though they may be struggling financially.

It raises fundamental questions about the fairness of the current system and whether it needs urgent reform, experts have said.

Former pensions minister Ros Altmann expressed her concern, saying: “It is indeed concerning that someone living just on the state pension could end up having to pay tax.

“The pension credit level is not far behind and it would surely be ridiculous for someone on means-tested benefits to be dragged into the tax net.

“This issue has been building up for some time as the tax threshold has been frozen while pensions have increased.”

As the state pension continues to rise, Altmann argued that it could force pensioners to make tough choices.

She said: “Pensioners already face financial difficulties, and now some may face additional challenges as their income exceeds the threshold for tax liability. We must ensure that policies to support pensioners don’t end up creating additional burdens.”

Sir Steve Webb, former pensions minister and now partner at LCP, noted that the situation could lead to an absurd outcome for some pensioners.

He said: “By 2027, it seems certain that the standard rate of the new state pension will be above the tax-free threshold.

“For pensioners with no other taxable income, this could result in a small end-year tax liability which will typically be collected by HMRC through the ‘simple assessment’ process.

“One absurdity of the whole situation is that a pensioner living purely on the new state pension could be regarded as poor enough to receive benefits to help with rent and council tax bills, whilst at the same time being regarded as rich enough to pay income tax.”

The growing number of pensioners falling in to the income tax net is a pressing issue that will likely become a major political topic in the upcoming years, Webb said.

According to experts, the problem is not limited to tax policy alone but reflects the broader issue of “fiscal drag” – a situation where a lack of uprating of tax thresholds alongside inflation-driven increases in income creates an unintended and unfair tax burden on individuals.

Greer, of Quilter, suggested that Labour may look to reform the triple lock, potentially linking increases to earnings rather than inflation.

He said: “What was intended as a mechanism to protect pensioners from poverty is now colliding with fiscal drag.

“One potential reform to the triple lock is to link increases to earnings, with a temporary CPI [Consumer Prices Index] indexation when inflation exceeded wage growth but generally falling in line with long-term wage increases, helping align pension growth with the wider economy and creating a more predictable and affordable system.”

This is when the state pension is pegged to a fixed minimum proportion of average earnings.

If the CPI measure of inflation exceeds wage growth, pensions would temporarily be adjusted based on the measure of inflation. Once earnings growth again exceeded inflation, it would revert back to this measure.

However, experts caution that any change to the triple lock system must be carefully considered, given the state pension is the largest area of welfare spending and is a vital source of income for millions.

Webb concluded: “If Labour is serious about building a fairer and more sustainable system, it cannot ignore the long-term pressures the triple lock presents.”