Why more pensioners could pay income tax from April 2027

Although the State Pension has always constituted taxable income, from April 2027, it is likely to surpass the personal allowance for the first time, meaning many more pensioners could begin paying tax on it.

The income tax personal allowance has been frozen at £12,570 since 2021 and is currently expected to remain at this level until at least April 2031. By contrast, the full State Pension for 2026/27 is £12,547 a year, just £23 below the personal allowance.

As the State Pension is protected by the triple lock, which guarantees a minimum annual increase of 2.5%, it is now likely that it will rise above the personal allowance from April 2027.

How State Pension increases are calculated

The annual increase in the State Pension is calculated using the triple lock, which sets the increase each April to be whatever is the greater of:

• Average wage growth from May – July of the previous year
• Inflation, as per the Consumer Price Index (CPI) up to September of the previous year
• 2.5%

This mechanism has helped protect pensioners’ incomes in recent years, but when combined with a frozen personal allowance, it increases the likelihood that the State Pension will remain taxable for the foreseeable future unless allowances rise.

What this could mean for retirement planning

For many individuals, the State Pension will soon make up most or all of their personal allowance. Any additional income – such as payments from a workplace or personal pension, savings interest* or part‑time work – could then trigger an income tax bill where none previously existed.

As a result, some pensioners may find themselves paying tax for the first time in retirement, or paying more tax than expected.

How tax is paid in retirement

How income tax is collected depends on where the income comes from:

• Income from a State Pension will normally be collected by HMRC using a Simple Assessment following the end of the tax year. This will set out how much tax is owed and when it needs to be paid.
• Income from a workplace/personal pension is normally deducted by the pension provider under Pay As You Earn (PAYE) through your tax code. Make sure to regularly check that your tax code is correct.
• Income from other sources alongside PAYE income will normally be collected through your tax code.
• Self-employed income or total income over £150,000 a year will require a Self Assessment tax return to be submitted.

How to minimise tax liability in retirement

Ahead of the likely change in April 2027, there are several steps that may help reduce or manage tax exposure:

1. Check how much State Pension you are likely to receive – The Government website has a handy tool to calculate how much State Pension you are likely to receive. Usually, 35 years of National Insurance contributions (NICs) are required to qualify for the full amount. If you don’t currently need the income, you can defer it and receive deferred amounts at a future date when your other income has decreased.
2. Review other income sources – Check what other income sources you have from private pensions, savings, investments or employment so you’re fully aware of how far above the personal allowance your income will be and likely tax bills you may face.
3. Stagger your non-State pension withdrawals – Currently, individuals can access their pension from age 55, increasing to 57 from 2028. Up to 25% of the pension can be taken tax-free for most people, therefore taking small, regular amounts can be an option.
4. Utilise your ISA allowance – Income received from ISAs, including interest, dividends and gains on investments, is tax-free. By using ISA savings to provide income, the amount of taxable income that an individual needs to take from their pensions can be reduced.
5. Other tax wrappers – you may be able to defer the payment of tax through use of Onshore or Offshore bonds, where there is no immediate taxation on gains. This can help preserve wealth and could help better manage your ongoing tax liability. These products carry investment risk and may not be suitable for all investors

As with all tax and retirement planning, suitability depends on individual circumstances, and decisions should be reviewed regularly.

We’re here to help

With the frozen personal allowance potentially bringing more people into eligibility for paying Income Tax, forward planning has never been more important. Reviewing retirement income now can help avoid surprises and ensure your money is structured as efficiently as possible. We can also help if you do need to start reporting your income via Self Assessment.

If you would like to discuss your circumstances or have any questions, please get in touch with a member of our specialist team.

* Tax on savings income will increase by 2% to 22% from April 2027. This reduces your return on interest of 3.5% closer to 2.7%, meaning tax may now begin to create an inflationary drag on savings once more (interest less than inflation = eroding money).

Risk Warnings

This article is for information purposes only and does not constitute personal financial advice. The information is based on current legislation and HMRC practice, which may change in the future. Tax treatment depends on individual circumstances. The value of investments and any income from them can fall as well as rise and you may get back less than you originally invested.