State pension income tax warning - will you need to pay?

Over half a million more pensioners could have to start paying income tax if their state pension is boosted by the 'triple lock' next year, experts warn.

The triple lock is a promise to boost the state pension by either September’s inflation rate, earnings growth (from the period between May and July) or 2.5% – whichever is highest.

In April, it's looking likely that pensioners will see a rise of 8.5% thanks to soaring earnings growth, and this could tip more pensioners over their personal allowance. 

Here, Which? takes a closer look at how the state pension boost could trigger a tax bill and explains how to pay if your income exceeds the threshold.

How is the state pension 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 the state pension, is greater than your personal allowance, tax is due on your state pension and this will normally be deducted from any private pension or earnings you might have, which are paid through the PAYE system.

However, if you have no PAYE income, you'll have to complete a self-assessment tax return and pay any tax due directly to HMRC.

• Find out more: income tax on your pension 

How much could the state pension pay in April 2024?

An 8.5% bump would mean the full new single-tier state pension would be worth £11,502.40 a year – a rise of £902. This means those eligible would receive £221.20 a week (rounding up to the nearest 5p). 

However, there is some speculation the government may use the lower earnings figure of 7.8% that excludes bonuses. 

The government usually confirms the final amount in November.

• Find out more: how much could the state pension pay in 2024?

What this means for your tax bill

The downside of a more generous state pension increase is that more pensioners may have to pay tax on their overall pension income in the coming years. 

This is because the personal tax threshold is due to remain at £12,570 until 2028. 

Currently, the 2023-24 full rate of the new state pension takes up all but £1,970 of the personal tax allowance (£12,570 minus £10,600). 

If the state pension were to rise by 8.5%, this would leave just £1,068 of your personal tax allowance (£12,570 minus £11,502). 

This means even those with a modest private income will be tipped into paying the basic rate of tax at 20%.

• Find out more: Income tax calculator 

State pension tax warning 

Consultancy firm Lane, Clark and Peacock (LCP) has estimated that half a million pensioners could have to pay tax on their pension if it rises by 8.5%.

It said that between 2022-23 and 2023-24, HMRC figures suggest the numbers of those aged 65+ who pay income tax rose by 7.73 million to 8.5 million after this year’s bumper state pension increase of 10.1%. 

If it goes up another 8.5%, this would be expected to increase the number of taxpayers to 9.15 million – an increase of around 650,000, according to LCP.

Sir Steve Webb, former pensions minister and partner at LCP added: 'Once again, "stealth" taxation proves a convenient revenue raiser for the Chancellor.'

• Find out more: 9 pensioner perks and benefits to boost your income 

Will the state pension overtake the personal allowance?

In the 2022 autumn statement, it was confirmed that the personal allowance and thresholds for income tax and National Insurance would be frozen until April 2028. 

If this policy remains in place, and if the state pension was to increase by more than 3% each year, it would overtake the personal allowance.

Experts believe this scenario would create an administrative and political headache for the future government in charge.

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How tax is paid on your pensions

Whether the state pension is your only income or you're still in work, this is how your tax bill will need to be paid:

If you get a personal pension and the state pension

Your pension provider will normally take off any tax you owe before it pays you. It will also take off any tax you owe on your state pension.

If you have more than one personal pension, HMRC will ask one of your providers to take off the tax due on your state pension. 

At the end of the year, you'll get a P60 from your provider showing how much tax you've paid. 

If the state pension is your only income

In this case, you're responsible for paying any tax you owe and will need to fill in a self-assessment tax return.

If you started getting your pension on or after 6 April 2016, don’t send a tax return. HMRC will write to tell you what you owe and how to pay

• Find out more: how to fill in a self-assessment tax return  

If you're still in work

Your current employer will take any tax due off your earnings and your state pension under PAYE.

If you're self-employed, you must fill in a self-assessment tax return at the end of the tax year, declaring your overall income. 

If you have other income

You’re responsible for paying any tax you owe on income other than money from your pensions. For example, this could be money from investments, property or savings. 

• Find out more: how much will you need to retire?