Personal finance expert has warned that State Pension recipients with any additional income will face tax from 2027 due to £12,570 rule
Money-saving expert Martin Lewis has delivered a fresh warning for State Pension recipients, confessing: “that does feel unjust”. On his latest BBC Podcast, the financial guru raised alarm bells over growing fears that Brits receiving the full new State Pension will soon find themselves liable for tax.
The concerns emerged following Chancellor Rachel Reeves‘ decision to freeze income tax thresholds until 2031, a move set to drag millions more into paying higher taxes through inflation-driven ‘fiscal drag’ – pushing even the lowest earners beyond a crucial income threshold. Anyone earning above the £12,570 tax threshold will be liable to pay tax.
The problem stems from the triple lock – which guarantees State Pension rises by at least 2.5 per cent annually – meaning it will breach that barrier in 2027. During his podcast, a listener called Jinx posed the question: “I have a tiny private pension £100 a month. That on top of the State Pension I get today puts me over the threshold for paying tax so I pay tax and have £7 deducted each month. Is that the tiny amounts the chancellor is talking about?”.
Mr Lewis responded: “I suspect this is someone who saw the interview I did with the Chancellor on my TV show and which I put on social media. It was a really interesting one because I asked the Chancellor ‘we know that from 2027 someone on the full new State Pension will start to pay tax even with no other earnings’.
“And that’s because from April 2026 the full new State Pension is only about £25 below the personal allowance – the amount you can earn each year before you pay tax on it. And as the State Pension must rise by a minimum of 2.5 per cent because of the triple lock and the personal allowance is frozen until 2031 by definition from 2027, someone on the new full State Pension will be earning more than the personal allowance. Certainly, in 2028 and 2029, that will continue to happen even more so.
“So my concern when I asked the Chancellor about this, she’d mentioned something in the Budget about not having to do self assessments and I wanted to understand from an administrative basis how she was going to protect, and I asked the question because I had 6,000 questions come in, I asked the question from one of my viewers ‘my father is an 85-year-old with onset dementia, is he going to have to do a self assessment return’.”
Mr Lewis was taken aback by Rachel Reeves’ response: “The Chancellor answered, and I caught something in her answer, so I said ‘sorry, are you saying they won’t have to do the self assessment return, or are you saying that people won’t have to pay tax?’ And she said ‘no I’m saying that people who get the full new State Pension and have no other earnings will not have to pay tax in the terms of this Parliament.'”.
“What was fascinating was that in the Budget, that’s what she’d thought she’d said. But nobody picked up on it. Everybody thought they wouldn’t administratively do a self-assessment. But what she actually meant was they wouldn’t actually have to pay tax.
“I followed it up by saying ‘what about an edge case where someone who has the full new state pension and £50 a year nothing private pension. And she said ‘no guarantee is only for those people who have the full new State Pension’.”
The outcome was a bitter pill to swallow for Jinx and others in her situation. He clarified: “I’m afraid to say that in your case you’re a tiny bit over the threshold because you have other income, £100 a month, you will have to pay tax. 2 things the Chancellor said which I think is important to reiterate. One, she was talking from 2027 onwards, and 2 she said ‘we are working through how we will do this.'”.
“So the exact way it will work has not been formulated. In my head this did bring up a few issues. You could have somebody who has the new State Pension but doesn’t have the full new State Pension – they are a few years short – has a private pension but tops it up a little bit, is earning over the threshold but less than the full new State Pension but because it’s a mix of state pension and private pension would have to pay tax on it. That does feel a little bit unjust.
“You equally have the problem that there are some people on the old State Pension now who get the basic State Pension and the second SERPS pension on top who are already over, just, on state pension income over the personal allowance,” he warned.
Mr Lewis admitted to being inundated with queries following his chat with the Chancellor, but confessed that the specifics of how it would all be implemented remain murky.
To tune into his podcast, click here.
