Millions of pensioners across Britain are now just £22 away from crossing the income tax threshold, as rising State Pension payments continue to close the gap with the frozen Personal Allowance.
The issue could leave many retirees facing an unexpected tax bill, particularly those with income from workplace pensions, savings or part-time work. With the full new State Pension now standing at £12,548 for the 2026/27 tax year, pensioners have only a small margin before exceeding the £12,570 Personal Allowance.
State Pension Nearly Matches the Personal Allowance
The Personal Allowance is the amount of income people can receive each tax year before paying income tax. For the current tax year, that threshold remains fixed at £12,570. At the same time, the full new State Pension has increased to £12,548, leaving a difference of just £22.
Antonia Medlicott, founder and managing director of financial education specialists Investing Insiders, said many retirees overlook the impact this can have on their retirement plans.
She said: ‘The standard UK income tax Personal Allowance currently sits at £12,570, so everything you earn up to this amount each year is free of tax. However, your State Pension is also included in this amount at £12,548 in 2026/27, so you’re left with just £22 of tax-free income before making a single withdrawal from any other pension.’
Medlicott said failing to account for this could affect how people access their retirement savings.
Why More Pensioners Are Facing Tax Bills
The growing number of pensioners entering the tax system is largely the result of frozen tax thresholds and rising pension payments. While the State Pension has continued to increase under the triple lock, the Personal Allowance has remained at £12,570.
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As pension income rises but tax thresholds remain unchanged, more people are likely to exceed the tax-free limit. This means some retirees who previously paid no income tax could become taxpayers without any significant change to their financial circumstances.
What Counts Towards Taxable Income?
Many people assume the State Pension is tax-free. However, HM Revenue and Customs treats it as taxable income. Income from several sources can be added together when calculating whether someone exceeds the Personal Allowance.
These include:
- State Pension payments
- Workplace pensions
- Personal pension withdrawals
- Earnings from employment
- Savings interest outside an ISA
- Certain investment income
For someone receiving the full new State Pension, even a small amount of additional taxable income could push them above the threshold. A pensioner receiving £12,548 through the State Pension would exceed the Personal Allowance with just £23 of extra taxable income.
Government Plans Remain Under Development
The Government has previously announced plans aimed at ensuring pensioners who rely solely on the State Pension do not face unnecessary tax complications. However, details of how those measures will operate in practice have yet to be fully outlined.
Questions remain about how pensioners with small amounts of additional income, such as modest savings interest, may be treated under future arrangements. Further guidance is expected as the policy develops.
What Pensioners Should Do
People approaching retirement or already drawing pension income may wish to review all of their income sources to understand how close they are to the Personal Allowance threshold. Those who believe they may owe tax can check their tax code or contact HM Revenue and Customs for further guidance.
For many pensioners, the difference between remaining below the tax threshold and becoming liable for income tax is now just £22. With State Pension payments continuing to rise and tax thresholds remaining frozen, more retirees could find themselves paying income tax for the first time.
