State pensioners to be hit with Labour’s ‘retirement tax’ next year

Millions of pensioners relying on the state pension have anxiously awaited their annual increase, but many now face Labour’s retirement tax for the first time. As of 6th April 2025, the full new state pension rises to £230.25 a week, £11,973 a year.

The latest 4.1% increase is welcome news to most. But will likely push more than 650,000 pensioners into the income tax net for 2025-2026. Frozen tax thresholds and the triple lock guarantee are pushing more pensioners into Labour’s retirement tax trap.

The tax-free personal allowance is currently £12,570. This means additional state pension payments will now fall under Labour’s retirement tax for many retirees.

Before the 2025 increase, an estimated 2.6 million retirees were receiving more than the personal allowance. Experts estimate that the latest 4.1% pension rise will push another 650,000 pensioners above the tax-free threshold.

What is the triple lock?

The government implemented the triple lock to guarantee an annual increase in the state pension of at least 2.5%. The government may increase it beyond 2.5% if inflation or average earnings grow more quickly.

This year, for example, the state pension is set to rise by 4.1%, which aligns with average earnings growth. The increase relates to the highest of the three triple lock measures.

Current and projected state pension payments

As mentioned, the full new state pension 2025/2026 is £230.25 a week and £11,973 annually.

Officials calculate the state pension increase using either average earnings growth from May to July or the CPI inflation rate from the previous September.

The Office for Budget Responsibility forecasts a 4.6% triple lock increase in April 2026, which would raise the full new state pension to £240.85 a week, or £12,524.20 a year. 

Some expert analysts forecast that average earnings will be higher than predicted in July, reaching 5.5%. Analysts suggest inflation in September will be higher than previously expected. A rise of 5.5% would mean £242.91 a week and £12,631 a year. That would push more pensioners above the tax-free threshold and deeper into Labour’s retirement tax.

A 5.5% rise means pensioners on a full new state pension will be liable for a 20% tax on £61, £12,631 - £12,570, which would be £12. Of course, anyone whose income is higher will be facing a higher tax bill.

Those whose only income is the full new state pension will be looking at paying taxes for the first time in retirement.

The personal allowance

The government has frozen personal income taxes since 2021. In May 2024, Conservative Chancellor Jeremy Hunt announced the income tax-free personal allowance would remain frozen at £12,570 until 2028.

The current Chancellor, Rachel Reeves, has confirmed that the freeze will stay in place until 2028, but there will be no further extension. In 2028/2029, the personal income tax thresholds will then update annually in line with inflation rates.

When these thresholds increase, everyone can receive more income without paying more taxes.

Financial experts accuse governments of keeping the thresholds frozen for years solely to boost their own coffers.

Income tax rates

If your earnings or income are £12,570 or less, you do not pay income tax.

You pay the basic 20% income tax rate on earnings and income of between £12,570 to £50,270.

The higher rate of 40% income tax is applied to earnings and income between £50,270 and £125,140.

The 45% additional income tax rate applies to earnings and income above £125,140.

In the past, income tax thresholds generally rose annually. This meant that people could earn more and receive salary increases without paying more tax.

The extensive freeze on thresholds from 2021 until 2028 has resulted in higher tax bills for a huge percentage of the UK population.

Final thoughts

In the tax years 2025/2026 and 2026/2027. Hundreds of thousands more pensioners will now be caught by Labour’s retirement tax on their state pension.

Of course, this will most impact the less well-off, who are already struggling with the constant rise in the cost of living.

For those with additional income sources and already liable for income tax the effect will have less of an impact.

However, nobody is ever happy at having to pay more taxes on their hard-earned incomes.

For some, it may be worth seeking professional tax and/or financial advice to review and understand their tax obligations regularly.

A professional may have practical suggestions regarding tax-efficient solutions. They will focus on managing income and can advise on keeping tax bills to a minimum.

Finally, keep yourself updated on government announcements. Especially regarding pension increases and any potential changes to income tax thresholds.