State pension tax looms for 1 million retirees as 'time running out to pick a solution'

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Retirees are expected to pay tax on their state pensions alone for the first time due to the impact of fiscal drag and triple lock

An estimated one million pensioners whose sole income comes from the state pension are heading towards an unprecedented tax bill from April 2027, with "time running out" for the Labour Government to resolve the situation.

The tax-free personal allowance has been stuck at £12,570 since the 2021/22 tax year and is now set to remain at that level until April 2031.

Meanwhile, the triple lock guarantee, which raises the state pension each year by whichever is highest among earnings growth, inflation, or 2.5 per cent, is on course to push the full new state pension above that threshold within months.

The Treasury has promised to set out how it will prevent these pensioners from facing tax demands, but no detail has been forthcoming.

At present, the full new state pension stands at £241.30 per week, which translates to £12,548 annually, a margin of just £22 beneath the personal allowance ceiling.

The triple lock's built-in floor of 2.5 per cent means that even the smallest possible uplift next April would be enough to carry the annual figure past the £12,570 line.

Consultancy LCP has calculated that simple assessment demands would amount to roughly £88 in 2027/28, rising to £153 the following year and reaching £220 by 2029/30.

During the 2025 Budget, then Chancellor Rachel Reeves directly addressed the looming problem, pledging that "people only in receipt of the basic or new state pension do not have to pay small amounts of tax through Simple Assessment from April 2027".

That commitment was widely read as an indication that the tax would simply be written off, at least for the duration of this parliament.

The Budget document went further, stating that ministers were exploring the optimal approach and would provide additional detail the following year.

Fidelity International's Ed Monk said: "If the government decides not to collect this tax it risks creating a two-tier system: many pensioners can be taxed on their state pension perfectly well because they have private pension income and a tax code.

"Would it be fair to deny them a waiver for paying tax on their state pension? Bear in mind that they need only a very small private pension to be taxed this way, so they may not be much better off than others who get only the Government payment."

He also flagged the risk of "intergenerational conflict, of pensioners being handed another break in a system which already advantages them compared with working-age people".

Should ministers instead opt to bring state pensions within the PAYE framework, Mr Monk described that alternative as both costly and unwieldy.

The Low Incomes Tax Reform Group had previously cautioned that dispatching simple assessment notices to thousands of pensioners would likely trigger widespread bewilderment and cashflow difficulties among those already managing on tight budgets.

Mr Monk added: "Time is running out for the Government to pick a solution."