State Pension Tax Trap: Why Retirees Now Pay Income Tax

Two numbers now sit uncomfortably close together. The full new state pension, after April's 4.8% triple-lock rise, pays £12,547.60 a year. The personal allowance — the amount you can earn before income tax starts — is £12,570.

The gap between them is £22.40.

That is the entire buffer standing between millions of pensioners and an income tax bill. And it is shrinking every year, without a single tax rate ever being changed.

How the collision happened

The state pension rises under the triple lock: the highest of average earnings growth, CPI inflation, or 2.5%. For 2026/27 earnings won at 4.8%, lifting the full new state pension from £230.25 to £241.30 a week — an increase of up to £574.60 a year. The older basic state pension rose too, to £9,614.80.

The personal allowance did not move. It has been frozen at £12,570 since 2021, and it is legislated to stay frozen until April 2031. Had it simply tracked inflation, it would comfortably exceed £15,000 by now.

So one number climbs, the other stands still. This is fiscal drag, and it is the most politically convenient tax rise there is: nobody has to vote for it, and no rate appears to change.

Who actually gets dragged in

If the state pension is genuinely all you have, you are still — just — safe. On £12,547.60 of income, your tax bill is £0.00, because you remain under the allowance by £22.40.

The trouble starts the moment you have anything else. A modest private pension, an annuity, even a few hundred pounds of savings interest — it lands on top of a personal allowance that is already almost entirely consumed. Nearly every pound of it is taxable at 20% straight away.

Look at the £15,000 row. A private pension of just £2,452.40 on top of the state pension produces a tax bill of £486.00. That is not a wealthy retiree. That is someone with a small workplace pension from a decade of employment.

The one piece of good news: no National Insurance

Pensioners have a genuine advantage that is easy to overlook. Once you reach State Pension age you stop paying Class 1 National Insurance — on your pension and on any earnings from a job.

A worker on £25,000 pays income tax and roughly £994 in National Insurance. A pensioner on £25,000 pays the £2,486.00 of income tax and nothing in NI, keeping £22,514.00. On identical gross income, the pensioner is meaningfully better off.

This is why comparing a pension to a salary "like for like" is misleading. The tax bands are the same. The National Insurance is not.

Why your tax code looks so strange

Here is what confuses people most. The state pension is paid gross — the DWP never deducts tax from it. But it is fully taxable income.

HMRC solves this by going after the only pot it can actually deduct from: your private pension. It reduces your tax code so that the tax owed on the state pension is collected through PAYE from the private one. Pensioners open their coding notice, see a number far below the standard 1257L, and reasonably conclude something has gone wrong.

Nothing has gone wrong. On £25,000 of income, the full £2,486.00 is being taken out of the private pension, even though most of that tax is really due on the state pension. It is the same money, collected from a different place.

If you have no private pension to code against, HMRC bills you directly under Simple Assessment.

What changes in 2027/28

The government has confirmed that from 2027/28 it will stop sending Simple Assessment bills to pensioners whose only income is the state pension. This removes an administrative absurdity — chasing someone for a few pounds costs more than it collects.

But be clear about what it does and does not do. It spares the state-pension-only group a letter. It changes nothing for the far larger group who have any private pension at all. The arithmetic above still applies in full, and it gets worse each April as the triple lock pushes the state pension further up an allowance that refuses to move.

On current policy, the full new state pension will overtake the personal allowance within a few years. At that point, pensioners with no other income whatsoever become taxpayers — not because anyone raised a tax, but because a threshold stood still for a decade.

Frequently asked questions

Do pensioners pay National Insurance?

No. Class 1 National Insurance stops at State Pension age, on both pension income and any earnings from work. Income tax still applies as normal.

Is the state pension taxable?

Yes. It is paid without tax deducted, but it counts in full against your personal allowance. The full new state pension of £12,547.60 uses all but £22.40 of the £12,570 allowance.

Can Marriage Allowance help?

If your spouse or civil partner is a non-taxpayer, they can transfer £1,260 of their allowance to you, which can be backdated up to four tax years. On a £25,000 pension income that is worth a meaningful annual saving — check it before assuming you owe what HMRC says.