The eligibility rules for the state pension are changing soon
State pensioners have been warned they may soon be hit with new tax demands. The update comes as crucial changes to state pension eligibility rules are coming in this year.
Pensioners will shortly receive a payment rise, as state pension amounts are set to climb by 4.8 per cent this April. The boost will lift the full new state pension from its current £230.25 weekly rate to £241.30 per week, while the full basic state pension will jump from the existing £176.45 weekly to £184.90 per week.
A worry emerging is that the full new state pension, valued at £12,547.60 annually from April, will shortly consume the entire £12,570 personal allowance. This means claimants receiving the full new figure alone will become liable for income tax.
As the triple lock raises payments annually by at least 2.5 per cent, the full new state pension will certainly exhaust the complete personal allowance from April 2027. The triple lock requires that payments rise in accordance with whichever is greatest: average earnings growth, the inflation rate, or the 2.5 percent minimum.
Derence Lee, chief finance officer at savings provider and insurance firm Shepherds Friendly, said: “Due to the extremely high levels of inflation the UK has experienced since 2020, state pensions have been increasing at a rate that some experts believe to be unsustainable in the long term. With pensions expected to surpass the frozen tax-free allowance limit next year, which will remain unchanged by the Government until 2028, more retirees will be pushed into the tax-paying bracket.
“As a result, pensioners should begin to take into account that they may soon need to pay income tax on their pensions should no changes be made to current status-quo.” The finance expert warned this could have a big impact for some pensioners.
‘Significant financial implications’
He said: “While the triple lock has been helpful in ensuring retirees’ incomes keep up with the cost of living, taxing pensioners could have significant financial implications, particularly for those who rely heavily on their pensions to cover essential living costs and make ends meet.” With the threat of a new tax bill looming, the Government announced in 2025 that those whose sole income is the state pension will not be required to pay minor amounts of income tax on their payments in the future.
In response to a written query about the issue, DWP minister Torsten Bell said recently: “The Government will provide more details in due course.” Speaking to the Treasury Committee, senior officials from HMRC recently discussed how the change will be brought in.
Cerys McDonald, director of Individuals Policy, said they will need to introduce new legislation to implement the change. She explained: “We would expect this to go through the next finance bill in the Autumn but we have mobilised a project team already in anticipation of having to make this change.
“The mitigation that we would normally use to recover this tax is simple assessment, normally we wouldn’t be processing that for 2027/2028 until after the 2028 tax year, so we’ve got a decent run in here.” Mr Lee said that extra support is available to state pensioners struggling with living costs.
He said: “To help with retirement costs, Pension Credit can help those of state pension age on lower incomes. For example, single pensioners can get their weekly allowance topped up to £218.15, or £332.95 as a couple, both of which are below the tax-free allowance threshold.
“Furthermore, those still working part-time or receiving self-employed income might consider making additional contributions to a private pension to help with costs once they retire from work completely.” He also offered some financialo guidance for people approaching retirement.
The specialist explained: “For those looking to retire in the near future, they should consider how their income can be built up by saving into a tax-free ISA, growing their savings through investments where possible, and utilising workplace pension schemes to secure their future income during retirement. Due to the increasingly aging population and the context of economic uncertainty, it can be hard to predict what the future of the triple lock will look like, so it’s always best to have a financial back up plan in place where possible.”
Major policy shifts on the horizon
The state pension age is rising from this April, climbing from the present 66 gradually to reach 67 by April 2028. Legislation is also in force for this to increase once more to 68 between 2044 and 2046.
A review of the state pension age published in 2023 recommended advancing the transition to 68, but this proposal was not adopted by the then Conservative Government. Labour confirmed in 2025 there would be a further review of the state pension age.
If you’re considering boosting your ISAs, following Mr Lee’s advice, you may also want to note some forthcoming changes here. The existing ISA allowance permitting deposits of up to £20,000 divided between any type of ISA is being reduced from April 2027.
From this date, you’ll only be permitted to use up to £12,000 of the allowance as you choose, while the remaining £8,000 won’t be available for cash deposits, meaning you’ll need to place this amount into investment-based accounts.
State pensioners won’t be impacted by the new rules, as those aged 65 and above will keep the existing ISA allowance.
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