The financial situation of millions of British retirees is set to undergo a historic transformation as their state pensions receive a major increase next year. According to official earnings data, the UK state pension will rise by 4.7% in April 2025. This could result in many pensioners paying income tax on their benefits for the first time.
Pension Rise Outpacing Inflation
The upcoming increase will increase the state pension for those over 66 by £561.60, bringing the annual payout to £12,534.60. This increase is above the current inflation rate of 3.8% and slightly above the 4.6% projected by the Office for Budget Responsibility (OBR) in March. The increase is part of the government’s “triple lock” policy, which guarantees pensions will increase each year according to the highest increase—pay rises, inflation, or a minimum of 2.5%.
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Tax Impact on Pensioners
This increase could take many pensioners above the current income tax threshold of £12,570, meaning their state pension could be taxed from 2027. Steve Webb, partner at pension consultancy LCP, said, “Under the triple lock, even pensioners with no other income will become taxpayers by April 2027.” Since the tax threshold is frozen until 2028, more retirees could enter the tax bracket, increasing financial pressure on those with fixed incomes.
Challenges in the Upcoming Budget
UK Chancellor Rachel Reeves faces the challenge of maintaining balance in the November budget. The government may find it difficult to provide comprehensive relief, but one possible solution could be to exempt state pensions under a separate tax threshold. Previously, the Conservative Party proposed a “Triple Lock Plus” plan, which would have adjusted the personal allowance in line with pension increases, and the estimated cost was £2.4 billion by 2029-30.
The Rising Cost of the Triple Lock
The triple lock policy, introduced in 2011 and continued by successive governments, has steadily increased pension costs. The OBR warns that by 2030, the policy will be three times more expensive than originally estimated. As the standard state pension approaches the personal allowance, nearly three-quarters of pensioners may now begin paying tax on benefits that were previously tax-free.
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Frequently Asked Questions
Question: Will the UK state pension be taxed in 2027?
Answer: Yes. From April 2027, if a pensioner’s total income exceeds the tax-free threshold, they may be required to pay income tax on their pension. Pension increases under the Triple Lock will take the Standard Pension above the current £12,570 allowance, unless the government adjusts the threshold.
Question: What is the Triple Lock on Pensions?
Answer: The Triple Lock ensures that UK state pensions increase each year according to the highest increasing option—pay rises, inflation, or 2.5%. This policy keeps pensioners’ income in line with the cost of living.
Question: When will the State Pension age be 67?
Answer: The State Pension age in the UK will increase to 67 in 2028.