Retirement expert warns number of pensioners paying tax set to soar due to rising incomes
Income tax rises for Scots in April - how the changes affect you
The latest HM Revenue and Customs (HMRC) data indicates that 8.7m pensioners are projected to pay income tax on their retirement income in 2025/26. It marks an increase of around 420,000 compared to the previous year (2024/25) and a rise of 1.85m from 10 years ago (2015/16).
However, Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, warns more pensioners will be 'dragged into taxpaying territory' over the coming years due to frozen income thresholds.
The Personal Allowance threshold will be frozen at £12,570 until April 2028, but the New State Pension is on track to exceed that income limit by April 2027. The full, New State Pension is worth £11,973 during the current financial year.
Ms Morrissey explained: 'The pension tax paying population is surging. On the one hand, this can be celebrated as a sign of rising incomes among this population, but it's also fair to say that frozen tax thresholds have also played a huge part in dragging more pensioners into taxpaying territory. With the freeze set to stay in place until 2028, we expect to see these numbers continue to swell.
'There are things that can be done to help manage these tax liabilities. For a start, up to 25 per cent of your pension can be taken tax free and this can be used alongside taxable income to keep you below an income tax threshold. Retirement income is also more than just about pensions, with ISAs also able to play a key role.'
It's important to be aware that the income from ISAs is tax free which means it can be used alongside your pension income to keep the tax bill down.
Ms Morrissey also highlighted how pensions can also play an important role in helping working-age people manage their taxes.
She explained: 'Paying into a pension reduces your adjusted income and this can reduce the amount of tax you have to pay or even stop you from breaching a threshold that moves you into paying tax at a higher rate.
'This can be especially helpful to those who earn between £100,000 and £125,140 per year who get hit by the stealthy 60 per cent tax trap that erodes your personal allowance.'
Under the Triple Lock policy, the New and Basic State Pensions increase each year in-line with whichever is the highest between the average annual earnings growth from May to July, CPI in the year to September, or 2.5 per cent. It is aimed at preventing the value of the State Pensions being whittled away by cost of living pressures.
The New and Basic State Pensions increased by 4.1 per cent in April, however, future forecasts from the Labour Government expect it to rise by 2.5 per cent over the next four financial years.
Using these calculations, it puts the full New State Pension on track to be worth £12,578.80 in the 2027/28 financial year - £78.80 over the Personal Allowance.
While the amount of State Pension to be taxed may seem relatively small - tax is only paid on the amount over the Personal Allowance - older people with other income streams could find themselves having to part with more cash to pay a tax bill - if it's not automatically deducted from private or workplace pensions through PAYE.
Online guidance at GOV.UK on who might need to pay tax on their pension also includes a handy tool to calculate how much tax someone might need to pay, and the different ways this can be done.
The latest State Pension Triple Lock predictions show the following projected annual increases:
2025/26 - 4.1%, the forecast was 4%
2026/27 - 2.5%
2027/28 - 2.5%
2028/29 - 2.5%
2029/30 - 2.5%
State Pension payments 2025/26
Full New State Pension
Weekly payment: £230.25
Four-weekly payment: £921
Annual amount: £11,973
Full Basic State Pension
Weekly payment: £176.45
Four-weekly payment: £705.80
Annual amount: £9,175
Future new State Pension forecasts
Under a 2.5 per cent increase, the full New State Pension will be worth:
2026/27 - £236 per week, £12,227.30 a year
2027/28 - £241.90 per week, £12,578.80 a year
What is taxed
Guidance on GOV.UK states: 'You pay tax if your total annual income adds up to more than your Personal Allowance. Find out about your Personal Allowance and Income Tax rates.
Your total income could include:
the State Pension you get - Basic or New State Pension
Additional State Pension
a private pension (workplace or personal) - you can take some of this tax-free
earnings from employment or self-employment
any taxable benefits you get
any other income, such as money from investments, property or savings
Check if you have to pay tax on your pension
Before you can check, you will need to know:
if you have a State Pension or a private pension
how much State Pension and private pension income you will get this tax year (April 6 to April 5)
the amount of any other taxable income you'll get this tax year (for example, from employment or state benefits)
You cannot use this tool if you get:
any foreign income
Marriage Allowance
Blind Person's Allowance
Use this online tool at GOV.UK to check if you have to pay tax on your pension.
The full guide to tax when you get a pension can be found on GOV.UK here.
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