The rise is down to the triple lock which means the state pension is tied to the highest of average earnings growth, inflation or 2.5%. The latest ONS figures showed the private sector had 4.7% earnings growth including bonuses for May to July 2025.
The government has not yet confirmed the 2026/2027 increase for pensioners, but this is usually confirmed in the autumn and it is committed to maintaining the triple lock.
A 4.7% increase would see the 'new' state pension rise by £561 to £12,535 a year, just below the frozen basic rate tax threshold of £12,570, meaning millions of pensioners will be perilously close to paying tax assuming they have no other earnings.
Those earning the old state pension would not be affected as their base pension is so much lower at £9,607 per year.
With the personal tax allowance frozen until at least 2028/2029, the triple lock is creating a tax nightmare. Before the 2024 general election, the Conservatives said they would introduce a special tax threshold for pensioners, but the current chancellor Rachel Reeves has never addressed the potential problem.
HMRC figures already show about 8.5m pensioners pay income tax, up from 7.8m just a year ago.
If nothing changes, the state pension will overtake the personal allowance entirely within a few years.
The tax problem raises further questions about the long-term sustainability of the pension triple lock, long criticised as a distorted measure and more of a politically driven factor to draw in pension age voters. With the Labour government's removal of the winter fuel allowance for the majority last winter, albeit the chancellor u-turned on the policy, it will be interesting to see whether there are any moves to address this issue before next year's Budget.
In March this year, the Office for Budget Responsibility projected that the state pension budget will rise to £182bn billion by tax year 2029/2030.
Removing the freeze on the personal allowance would come at significant cost to the Treasury at a time when the chancellor's fiscal headroom is already strained at best, while an overhaul of the triple lock would come with huge political risk before the next general election.
The state pension age will gradually increase to age 67 between 2026 and 2028, and it is due to rise to 68 in the mid-2040s, although this could be brought forward to the 2030's.
Peter Nichols FFA FTA FIPA Cert PFS
Tax Director, BFN Accounts & Tax – www.bfnaccounts.com