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Retirees may need to pay tax on their state pension from 2027
The full rate of the new state pension will exceed £12,570 in 2027-28
Retirees who rely on the state pension as their sole source of income are likely to need to pay income tax from April 2027.
The government has confirmed income tax thresholds will be frozen until 2028, but the triple lock guarantees the state pension will rise by at least 2.5% a year. This means the full rate of the state pension will exceed the £12,570 personal tax allowance in 2027-28.
Here, Which? explains how much tax you might need to pay on your state pension and shares four strategies to help pensioners reduce their tax bill.
How the state pension is taxed
The state pension isn't tax-free, but the money you receive is paid 'gross' – without any tax being deducted.
If your total income from all sources, including your state pension, is greater than your personal tax allowance, you'll need to pay income tax.
Tax will normally be deducted from any private pension or earnings you might have, which are paid through the Pay As You Earn (PAYE) system.
However, if you have no PAYE income, you'll need to complete a self-assessment tax return and pay any tax due directly to HMRC.
Currently, the full rate of the new state pension is £11,502 a year, and the personal tax allowance is set at £12,570 for most people. This means that if you have a workplace pension or any other form of income on top of your state pension, it’s likely you'll already be paying income tax.
As of next April, the state pension will rise to £11,975.60 – an increase of 4.1%. This will take up 95% of your personal allowance.
- Find out more: how much is the state pension worth?
When will the state pension exceed the personal allowance?
Under the triple lock, the state pension rises annually by either September’s CPI inflation figure, July’s wage growth, or a minimum of 2.5%.
The personal tax allowance will be frozen at £12,570 until 2028. In the Autumn Budget, the Chancellor confirmed income tax thresholds will start rising with inflation from that point onwards.
For the 2025-26 tax year, the full rate of the new state pension will fall just £594 short of the personal allowance.
Based on the guaranteed minimum increase of 2.5% per year, the state pension would exceed the personal tax allowance by £8 in 2027-28. This would theoretically result in a tax bill of £1.60 for pensioners.
| Tax year | Full rate of new state pension (annual) | % increase from previous year | Personal allowance |
|---|---|---|---|
| 2024-25 | £11,502.40 | 8.5% | £12,570 |
| 2025-26 | £11,975.60 | 4.1% | £12,570 |
| 2026-27 | £12,272 | 2.5% | £12,570 |
| 2027-28 | £12,578 | 2.5% | £12,570 |
These figures take into account the minimum amount the state pension can increase by per year (2.5%), so if there's a higher increase due to inflation or wage growth, pensioners could be drawn into paying more tax.
- Find out more: income tax rates explained
Four ways pensioners can cut their tax bill
Whether you already pay income tax on your pension or are looking to pay less in future, there are ways to reduce your tax burden as a pensioner.
1. Access pension cash gradually
You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. The most you can take is £268,275.
But this can also be accessed incrementally, with 25% of each withdrawal taken tax free, and this strategy can be useful in minimising the overall tax burden.
What you don’t take out can be left invested in your pension where it can grow tax free – and then give you chunks of tax-free cash when you need it.
- Find out more: should I take a lump sum from my pension?
2. Make the most of your allowance
Those on low incomes can access a special ‘starter rate’ for savings, which allows them to earn interest up to £5,000 without paying tax. Every £1 of other income (for example your pension) above your personal allowance reduces your starting rate for savings by £1.
You may also be able to earn up to £1,000 in interest before paying tax on your savings if you’re a basic-rate taxpayer, and up to £500 if you’re a higher-rate taxpayer under your personal savings allowance. Additional-rate taxpayers have no personal savings allowance.
It helps to think of these allowances sitting on top of each other; first the personal allowance (£12,570), then the £5,000 starting savings rate, and finally the personal savings allowance worth up to £1,000. This effectively means that you can earn up to £18,570 in 2024-25 before having to pay any tax on savings interest.
- Find out more: how the pensions annual allowance works
3. Consider an Isa
For those with larger savings pots, or additional-rate taxpayers, an Isa is a great way to save paying tax on savings interest or investment income.
You can put up to £20,000 in a cash and/or stocks and shares Isa and any income generated can grow completely tax-free, protecting your savings now and in the future.
- Find out more: best Isa rates
4. Keep paying into your pension
Many pensioners don’t realise they can continue paying into their pension, even if they’ve given up work or accessed their retirement savings already.
If you’re a UK resident and under 75 you can still save and earn tax relief on your pension contributions.
However, if you’ve already taken money from a money purchase, or defined contribution pension, your contributions (including tax relief) will be capped at £10,000 a year. This is known as the Money Purchase Annual Allowance (MPAA).
Continuing to pay contributions into your pension also could move you into a lower tax bracket as it helps reduce your overall income.
- Find out more: 6 ways pensioners can reduce their tax bill
