According to an article by This Is Money, pensioners may have to pay tax on the State Pension as soon 2026. It points to a study by Deutsche Bank, which suggests that the pension may rise by 5.5% in April next year, which would increase it to £12,631 in 2026 and push it over the Personal Allowance threshold.
The allowance determines how much you can earn before Income Tax is charged, and in 2025/26, is typically £12,570. While this means only a small amount of your State Pension will be exposed to Income Tax, the implications for other forms of income you use to support your retirement could be more serious.
Furthermore, as the Personal Allowance has been frozen at its current rate until April 2028, your exposure to the tax could increase further in the coming years. Read on to discover more and how a financial adviser might be able to help.
The ‘triple lock’ could mean higher tax bills for pensioners
Nowadays, the State Pension is likely to provide nothing more than a basic standard of living. However, it can provide a significant boost to any private income you might be receiving to fund your retirement, whether that’s from a private pension, investments or buy to let property.
As such, the State Pension is central to millions of people’s retirement strategy. Since 2011, the pension has typically increased every year in line with the ‘triple lock’, which means it rises by the highest of:
- average wage growth
- the rate of inflation
- 2.5%.
As a result, in 2025/26 the State Pension is up to £230.25 a week, or £11,973 a year. As such, it already uses up most of this tax year’s £12,570 Personal Allowance.
If it exceeds the allowance in 2026, as suggested by Deutsche Bank, all of your earnings from other sources will become exposed to the tax, which means your Income Tax liability could soar.
You may be able to reduce your exposure to Income Tax
It’s not all bad news, as you may be able to mitigate your exposure to Income Tax in retirement using your pension’s tax-free lump sum. This is known as the Pension Commencement Lump Sum (PCLS) and is normally available to retirees when they first access their pension.
Usually, the PCLS allows you to take up to 25% of your pension pot’s value as long as it doesn’t breach the Lump Sum Allowance. This is £268,275 in 2025/26, and any amount that exceeds the threshold will be liable to Income Tax.
While you can take all of your tax-free lump sum in one, you can also withdraw it in smaller, regular amounts. Any amount you withdraw once the PCLS has been used is also liable to Income Tax.
You may be able to use your PCLS as part of your income
In some cases providers allow you to take smaller, regular amounts from your PCLS while also taking an income from the taxable element of your pension. If this is something your pension provider allows, it may help you to reduce your income’s exposure to the tax.
For example, if you wanted an income of £24,000 a year, you could withdraw £1,000 a month from your PCLS and a further £1,000 from the taxable portion of your pension. If you’re receiving a full State Pension, which means all or most of your Personal Allowance will be used up, just £12,000 of your income may be exposed to tax, not the full £24,000.
Please note that this is only a simplified example for illustration purposes that may include different products. It does not consider any further taxes that might apply, and must not be taken as financial advice.
You may want to consider using ISAs
If you have an ISA, any amount you withdraw from it will typically be free of Income Tax. As such, incorporating ISAs into your financial retirement plan could be a shrewd strategy, as it could help to reduce your exposure to the tax.
As one of the UK’s largest truly independent financial advice companies, we can help you understand ways you could reduce your retirement income’s exposure to tax. Whether this is using your pension income in a more tax-efficient way, or by using ISAs and other assets that you may have, we’ll explain your options and which might be best for you.
Get in touch
If you would like to discuss how we could help you, please call 0333 010 0008. We would be happy to arrange a no obligation initial meeting with one of our independent financial advisers.
Join our informative webinar
Alternatively, you can join our informative webinar on preparing financially for your retirement, which takes place on Thursday 5 June at 6pm. The helpful online seminar is part of AFH’s commitment to demystify the complex world of finance and investing, and provide an insightful look at:
- Key financial considerations in the years leading up to retirement
- Using Pensions and different assets to generate an income
- What you may need to consider when you reach retirement
- How an annuity could protect your, and your spouse’s, lifestyle
- Protecting your retirement assets for loved ones when you die
To register for the webinar, please follow the link.
Monday 2 June 2025