Millions of people set to pay tax from their State Pension this year

Millions of elderly individuals receiving their State Pension will witness a 4.1 per cent increase in their weekly payments from next April. This follows the Office for National Statistics (ONS) announcement that the inflation rate for September was 1.7 per cent.

Under the Triple Lock, the New and Basic State Pensions rise annually in line with 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 payments go up from £221.20 to £230.30 each week. 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.

While pensioners across the country will welcome these increases, the annual payments also push more older people towards the personal tax allowance of £12,570. The Personal Allowance will remain frozen at £12,570 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 experts at Spencer Churchill have forecasted that nearly 900,000 more individuals will surpass the Personal Allowance threshold of £12,570 during the current financial year (2023/24). It's crucial to note 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 £3,756 before the personal tax threshold is exceeded, equivalent to additional income totalling £313 per month.

Over the 2025/26 financial year, this will rise to £9,175, leaving £3,395 before the personal tax allowance has been used - an extra £283 each month. Retirement expert Adam Pope from Spencer Churchill Claims Advice has warned that nearly two million people over State Pension age will feel the financial impact of the freeze on the Personal Allowance within the next four years.

Adam Spencer Churchill, a pensions expert, has raised concerns about the financial impact on pensioners due to the freezing of income tax thresholds. He noted that currently, 64% or approximately 8.1 million retirees pay tax in retirement, often because of additional income from workplace or private pensions alongside their State Pension.

He forecasts that nearly 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.

Spencer Churchill elaborated: "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."

He 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 further explained the potential consequences: "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."

Moreover, he warned of the broader implications of the frozen 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 set to confirm the new State Pension and benefits rates during the Autumn Budget on October 30.