Millions of UK pensioners will soon be required to pay income tax on their state pension due to frozen tax allowances, analysts warn. Deutsche Bank’s latest analysis projects that from April 2026, nine million retirees will be impacted as the state pension surpasses the current tax-free threshold.
State Pension Set to Cross Tax-Free Threshold
Forecasts indicate that the state pension will increase to £12,631 in 2025, exceeding the frozen personal allowance of £12,570. This breach means pensioners will be liable to pay income tax on their pensions, a situation critics have labeled as “Labour’s retirement tax.”
Deutsche Bank’s Chief UK Economist, Sanjay Raja, explained that the triple lock mechanism, which ensures pensions rise annually by the highest of inflation, average wage growth, or 2.5%, is driving the increase. Raja stated, “Our projection for average weekly earnings in the three months to July sits at 5.5% year on year.”
The bank anticipates this wage growth rate will surpass inflation, projected at 4.25% in September 2025, ensuring that the state pension increase remains substantial.
How Pensioners Will Be Impacted
With the state pension set to surpass the personal allowance, retirees will face income tax bills for the first time. Although the initial tax liability may be modest—as little as £12 in 2026—it is expected to grow over time. Former Pensions Minister Sir Steve Webb cautioned pensioners to prepare: “Retirees need to be mindful that their pensions may be taxed. They should consider setting aside a small portion of their pension to cover any future obligations.”
Currently, an estimated 250,000 pensioners already pay four-figure tax bills on their state pensions. With tax thresholds remaining frozen until 2029, the number of affected retirees is expected to increase significantly.
Labour Under Pressure Over Pension Tax Policy
Chancellor Rachel Reeves has upheld the tax allowance freeze first introduced by former Conservative Chancellor Jeremy Hunt, extending it to 2029. Critics argue that this freeze is a “stealth tax” on pensioners, as rising pensions push more retirees into taxable income brackets.
Labour has pledged to raise tax thresholds in line with inflation from April 2028, but slow economic growth may limit the government’s ability to do so. Analysts predict that by 2032, over 10 million pensioners will be subject to income tax.
The policy has also sparked political debate. During the last election campaign, former Prime Minister Rishi Sunak warned that Labour’s plan would result in a “retirement tax” on pensioners. The Conservative manifesto proposed a “triple lock plus” policy, which would have increased pensioners’ tax-free allowance in line with state pension rises. Labour dismissed this proposal, citing a lack of fiscal credibility.
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Government Defends Its Position
A spokesperson for HM Treasury defended the government’s approach, stating, “The state pension is the foundation for ensuring pensioners can live with dignity and respect. We remain committed to the triple lock. Pensioners whose sole income is the state pension and who have not deferred or received protected payments do not pay any income tax.”
Despite these assurances, financial analysts warn that more pensioners will inevitably become taxpayers due to rising pensions and frozen allowances.
What Pensioners Can Do
Financial experts advise pensioners to plan ahead for potential tax liabilities. Some steps retirees can take include:
- Reviewing Additional Income Sources: Those receiving private pensions, rental income, or other taxable earnings should assess their overall tax position.
- Exploring Tax-Efficient Savings: Investments in ISAs and other tax-free savings options can help mitigate potential liabilities.
- Seeking Professional Advice: Consulting with a financial adviser can provide clarity on managing pension income effectively.
As tax thresholds remain frozen, pensioners must remain proactive to ensure they are financially prepared for future tax obligations.
