Your State Pension Could Soon Be Taxed — Here's What The £23 Gap Means

The full new state pension now sits just £23 ($29) below the threshold at which UK income tax becomes payable, after the Treasury extended its freeze on the personal allowance until April 2031.

Weekly payments rose from £230.25 to £241.30 on 6 April under the 4.8 per cent triple-lock uprating, taking the annual total to £12,547. That leaves it narrowly below the £12,570 tax-free allowance, which has been held at its current level since April 2021. The freeze had been due to end in April 2028 before Chancellor Rachel Reeves pushed the deadline back by three years in the Autumn Budget.

The gap is small enough that modest additional income from a private pension, savings interest, rental property, or part-time work could tip over the threshold and into paying tax.

How The Allowance Freeze Is Pulling Pensioners Into Tax

The Office for Budget Responsibility estimates around one million extra pensioners will be drawn into paying income tax by 2031 as a direct result of the extended freeze. Most, the watchdog said, will pay only small amounts, though the cumulative impact sharpens an existing trend. About 8.3 million people of state pension age paid income tax in 2024/25, up from 5.9 million in 2011/12, according to HMRC figures reported by MoneyWeek.

Separate analysis by the Telegraph found that an additional 650,000 retirees were pushed into paying income tax on their state pension alone during 2025/26, lifting the total number of pensioner taxpayers to around 3.25 million.

Laura Suter, director of personal finance at AJ Bell, told the Telegraph that the freeze was quietly pulling more households into the tax system, often before they realised their income had crossed the line.

Had the personal allowance kept pace with inflation since 2021, calculations by the Institute of Chartered Accountants in England and Wales suggest it would stand at roughly £15,480 for 2025/26. The gap between that figure and the frozen £12,570 is the arithmetic behind fiscal drag, a stealth tax that raises revenue without any change to headline rates.

What Pensioners Face As The Allowance Gap Closes

Earnings above £12,570 are taxed at 20 per cent, rising to 40 per cent above £50,270 and 45 per cent above £125,000. For most pensioners with a small workplace scheme or savings pot, the 20 per cent basic-rate band is the one that bites first.

The Department for Work and Pensions does not deduct tax at source from state pension payments. HMRC usually collects any liability through a Simple Assessment, or by adjusting the tax code on a private pension so the tax owed comes out of the other pot. For retirees with no private pension to absorb it, a Simple Assessment bill can arrive unexpectedly several months after the tax year ends.

Ministers have said that pensioners relying solely on the state pension will not be required to pay tax from 2027/28, even if payments exceed the allowance. Treasury officials are still working out how to administer the exemption and have promised further details later this year. Anyone with a workplace pension, self-employment income, rental earnings, or unsheltered savings interest sits outside the planned carve-out.

On current trends, around 76 per cent of pensioners will be paying some form of income tax by 2032, Saga reported, while a survey it commissioned suggested roughly 41 per cent of retirees do not fully understand how the state pension is taxed.

For now, the £23 gap is holding. Next April's uprating, guaranteed under the triple lock to be at least 2.5 per cent, is all but certain to close it entirely.