Retirees may have to pay tax on the state pension as early as next year, analysis

Retirees may have to pay tax on the state pension as early as next year, new analysis suggests.

Annual state pension payments could soar by 5.5 per cent to £12,631 in April 2026, according to Deutsche Bank forecasts.

This means low-earning state pensioners will soon be forced to hand money back to the state in yet another gruelling tax grab.

The state pension increases each April by the highest of either 2.5 per cent, inflation or earnings growth figures under a mechanism called the ‘triple lock’.

No tax is currently due on state pension payments – which are set to rise to £11,973 a year for pensioners on the full, new state pension this April – as they are below the £12,570 tax-free personal allowance.

It was previously thought that pension payments wouldn’t breach the personal allowance until April 2027, according to official Office for Budget Responsibility (OBR) forecasts released alongside the Budget.

But pensioners could now be caught in the net from next year in a stealth tax raid as payments could rise beyond the personal allowance, which has been frozen since 2021 and will remain so until April 2028.

This new analysis from Deutsche Bank reveals average weekly earnings in the three months to July will be 5.5 per cent, higher than both the projected inflation figure and 2.5 per cent, so it is likely to be the measure used to calculate next year’s payment increase. Rob Morgan, analyst at wealth manager Charles Stanley, said: ‘Something’s got to give. The state pension is a safety net so this seems wholly inappropriate. For some people the state pension is their only income.’

This potential hike would mean low-earning retirees who only receive the full, new state pension would be forced to pay the basic 20 per cent rate of tax on income above £12,570 (file image)

No tax is currently due on state pension payments – which are set to rise to £11,973 a year for pensioners on the full, new state pension this April – as they are below the £12,570 tax-free personal allowance

This potential hike would mean low-earning retirees who only receive the full, new state pension would be forced to pay the basic 20 per cent rate of tax on income above £12,570.

This would land pensioners with a tax bill of just over £12.

Former pensions minister Sir Steve Webb said as it’s a matter of pounds HM Revenue & Customs may not decide to pursue the due tax for the first year.

‘But the following years the bill will be more because the tax thresholds have been frozen. Pensioners may well have spent the money because the bill isn’t known until after the tax year so people will have to set aside a bit of their pension.

‘We’re not talking about rich pensioners.’

Chancellor Rachel Reeves in her inaugural Budget announced frozen thresholds will rise in line with inflation from April 2028 but stopped short of unblocking the freeze this year.

However, this pledge has now been thrown into doubt as abysmal growth figures have squeezed the £9.9billion headroom she allowed herself against her own fiscal rules in the Budget.