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Millions of pensioners will see a 4.1 per cent increase in their State Pension from next April, according to the Office for National Statistics (ONS). The rise is due to the Triple Lock system, which ensures pensions increase annually by the highest of three figures: average annual earnings growth from May to July (4.1%), the Consumer Price Index (CPI) in the year to September (1.7%), or 2.5 per cent.
This means those on the full New State Pension will see their weekly payments rise from £221.20 to £230.30. As payments are typically made every four weeks, this amounts to £921.20.
Consequently, annual payments will increase from £11,502 to £11,975.60 over the 2025/26 financial year. Similarly, someone on the full Basic State Pension will see their weekly payments rise from £169.50 to £176.45, or £705.80 every four-week payment period.
Annual payments will increase to £9,175.40 over the 2025/26 financial year, reports the Daily Record. However, these increases also push more pensioners towards the personal tax allowance of £12,570, which will remain frozen until 2028.
Currently, some 8.1 million (64%) older people pay tax in retirement, largely due to additional income from workplace or private pensions on top of their State Pension.
Retirement specialists at Spencer Churchill have predicted that nearly 900,000 more people will exceed the Personal Allowance threshold of £12,570 during the current financial year (2023/24). It’s important to highlight that older individuals whose only income this year is the State Pension will not be taxed, and anyone with additional income who does not pay HM Revenue and Customs (HMRC) directly through earnings, will not receive a tax bill until June or July 2025, which must be paid by the end of January 2026.
The current, full New State Pension is worth £11,502 this year, leaving just £1,068 before the personal tax threshold is exceeded. Therefore, anyone with an additional income of £89 or more per month – on top of the State Pension – may receive a tax bill next year.
Next year, when the annual sum increases to £11,975.60, this leaves just £595 – approximately £50 per month – before the £12,570 personal allowance is exceeded. Someone on the full rate of the Basic State Pension currently receives £8,814, leaving just £3,756 before the personal tax threshold is exceeded, equivalent to additional income totalling £313 per month.
Retirement expert Adam Pope from Spencer Churchill Claims Advice has cautioned that nearly two million people over State Pension age will be financially impacted by the freeze on the Personal Allowance within the next four years. Currently, 64% of retirees, approximately 8.1 million, pay tax in retirement due to additional income from workplace or private pensions alongside their State Pension.
Pope forecasts that almost 900,000 more people will surpass the Personal Allowance threshold of £12,570 during this financial year, with an additional 2 million expected before the freeze concludes in 2028. He stated: “Freezing income tax thresholds for pensioners is worrying and could really affect their financial situation. Almost two million pensioners are expected to be hit by this in the next four years, meaning many of them will have to pay more tax.”
Pope added that the situation is particularly challenging for those primarily reliant on the State Pension: “With no change in the tax thresholds, they could find themselves owing more tax than they expected, making things hard if they don’t have much to begin with.”
The expert highlighted the serious financial impact of increasing State Pensions, explaining: “As the State Pension amount goes up, more pensioners could have to pay more tax, making life harder for those already struggling. Over 60 per cent of pensioners are paying income tax, up from about 50 per cent in 2010.”
Furthermore, the expert cautioned on the repercussions of stagnant income tax thresholds: “What’s more, keeping income tax thresholds the same could mean pensioners have less money to spend. By 2027/28, the average tax-paying pensioner could be £1,000 worse off which could really affect their living standards and financial safety.”
Chancellor Rachel Reeves is poised to announce the new rates for State Pension and benefits during the Autumn Budget on October 30.