State Pension is Likely to Rise by 3.9% – but Most Will Be Taxed.
A key part of the triple lock formula has been released, which could make the state pension taxable for the first time. Here’s what you need to know. Your state pension will likely rise by 3.9% next year, according to provisional data the Office for National Statistics published Tuesday morning.
That’s equivalent to £479, taking your pension from £12,547.60 to £13,036.60 and making a chunk of it subject to income tax for the first time.
“Those on the new state pension can expect to see an increase of nearly £500 per year next April, but the sting in the tail is that this will take the standard rate of the new state pension above the tax threshold,” says former pensions minister Steve Webb.
“The government’s plans to address this point are a mess, and likely to benefit only a small fraction of pensioners. They will also create unfairness between different groups of pensioners and between pensioners and low-paid workers, who do not qualify for any exemption.”
Weekly wages grew by 3.9% on average between May and July, the reporting period used in the government’s calculations.
Sky news is reporting that the rate looks all but certain to be higher than CPI inflation, measured at the end of September. The Bank of England doesn’t think inflation will beat 3.2% this year. That would make 3.9% the winning increase, taking your state pension above £12,570, the personal allowance, by £457.
If your total retirement income is below £50,270, you’ll pay a basic rate of 20% income tax on that.
We’ve also got to take into account another quirk of the state pension – the first week of the year is always paid at the old rate, the other 51 weeks at the new rate. So the real value of next year’s uprate would be an extra £388 (or 3.1%), and your take-home state pension after tax would be just shy of £12,936.
An income tax exemption applies to people who rely on the state pension as their sole source of income. To qualify, you can’t have a private pension or the old ‘basic’ pension.
Notably, it appears you won’t qualify if you delayed taking your state pension to benefit from the “increments” scheme, which increases payouts by 5.8% for each deferred year.
Only one in 16 pensioners will meet all these criteria, according to analysis from LPC.
Minister for pensions Torsten Bell said: “In line with the commitment made at Budget 2025, pensioners who only just exceed the personal allowance will not have the administrative burden of paying small amounts of tax in this Parliament. The Chancellor will set out further details on how that commitment will be delivered at the Budget.