DWP state pensioners warned they face paying hated tax within 14 months

The upcoming state pension increase on April 7 could push more pensioners above the hated income tax threshold, resulting in more of them paying tax. The 4.1% rise for the 2025/6 financial year will see the state pension increase from £11,502 to £11,973 annually.

However, Labour has announced that the personal allowance for tax, which is the amount one can earn before being liable for taxes, will remain frozen at £12,570 until the beginning of the 2028/29 financial year. This meant that any pensioners – the UK retirement age is 66 in the UK – who had an additional income exceeding £1,068 in 2024/5 through employment or other pensions would be subject to taxation. However, in 2025/6, an income above just £597 could result in a tax bill, the Daily Record reports.

For most individuals, this would be automatically deducted via PAYE on employment and tax on private pensions. Those who do not pay tax automatically through deductions would receive a tax bill from HMRC the following summer, which must be paid by January of the subsequent year.

Currently, nearly 8 million (62%) out of the 12.9 million State Pensioners in the UK are already paying some form of tax during their retirement. A person receiving the full new state pension, with no other source of income, would not be liable for income tax.

The implementation of auto-enrolment in workplaces – now in its 13th year – means that more people will have a higher income during retirement and will likely pay tax, typically deducted from their private pension.

In retirement, any tax owed is calculated based on the amount of income earned above the threshold, not the total additional income. For example, if an individual has a total annual income of £13,000, they would be taxed on £430 – the amount exceeding the £12,570 threshold. This person would then owe HMRC 20% of the £430 (or 19% in Scotland), which is the starter rate of tax.

The Labour Government has pledged to maintain the Triple Lock for the next five years. This guarantees that the New and Basic State Pensions will increase each year by whichever is highest between the average annual earnings growth from May to July (4.1%), CPI in the year to September (1.7%), or 2.5 per cent.

Income rates and tax bands in England are as follows:

£12,571 to £50,270 – 20%.

£50,271 to £125,140 – 40%.

over £125,140 – 45%.

In Scotland, the income rates and tax bands are:

£12,571 to £14,876 – 19%, Starter rate

£14,877 to £26,561 – 20%, Scottish basic rate

£26,562 to £43,662 – 21%, Intermediate rate

£43,663 to £75,000 – 42%, Higher rate