The retirement tax: Will the State Pension creep into the Income Tax bracket?

If you’re a high earner who has saved plenty of private pension wealth during your career, you may not have thought very hard about the State Pension.

Yet throughout your career, you will have paid National Insurance contributions (NICs), and these NICs are put towards providing you with a guaranteed pension income once you reach State Pension Age. As of the 2025/26 tax year, State Pension Age is 66, rising to 67 between 2026 and 2028.

While the State Pension won’t be enough to sustain your full lifestyle, it could act as the bedrock of your retirement fund, bolstering your private pension and savings income over the years.

Importantly, along with most other forms of retirement income, the State Pension could become subject to Income Tax soon.

Read on to discover why, what it might mean for your retirement, and how we might be able to help.

The State Pension triple lock increases payments annually

The State Pension rises every April, in order to ensure recipients can keep pace with the rising cost of living.

This agreement is called the triple lock, meaning the State Pension rises in line with the higher of:

• Wage growth
• Inflation
• 2.5%

For example, in April 2025, the full new State Pension rose by 4.1%, in line with wage growth measured in September 2024. Now that the increase has been implemented, the full new State Pension stands at £230.25 a week, or £11,973 a year.

The triple lock is a great way for retirees to keep up with rising costs. However, as the State Pension rises, it gets closer to the Income Tax Personal Allowance, which stands at £12,570 as of the 2025/26 tax year. The Personal Allowance is frozen until 2030. So, while the triple lock is instated annually, the Personal Allowance won’t rise for another five years.

Imagine that the State Pension went up by another 4.1% in April 2026 (this is an example based on last year’s increase, and is unlikely to match the 2026 increase exactly). In this scenario, the full new State Pension would rise from £11,973 a year to approximately £12,463 – a mere £107 below the Personal Allowance – meaning that its next increase after that would certainly nudge retirees’ payments into the Income Tax bracket.

What’s more, on 1 July 2025, the House of Commons Library published a statement clarifying that the State Pension will not be exempt from Income Tax.

It said, “The State Pension is liable to Income Tax. Historically governments have taken the view that State Pensions, as well as other ‘earnings-replacement benefits’, should be taxed this way.”

3 ways retirees could be affected by Income Tax on the State Pension

1. Your quality of life may decrease (but make sure to assess your circumstances before you panic)

Put simply, if you receive less each year, you will spend less each year. That means important goals, such as gifting money to the next generation, could need to be adjusted or put on hold. Or, you may need to sacrifice elements of your lifestyle to afford your plans.

That being said, it’s important to work out how much State Pension you are set to receive, and over time, how much Income Tax you may be liable to pay on it. Once you have calculated your unique position, you can begin to plan and prepare – be careful not to work on broad stroke assumptions, as you could be preparing for the worst-case scenario unnecessarily.

2. You could deplete your savings more quickly

Your retirement savings need to last your lifetime. That means, in short, that you need a plan in place – one that works on data and gives you peace of mind as the years go by. This is something our financial planners can help with.

This said, legislation changes all the time. Think back to the 2024 Autumn Budget, at which several changes were made to tax law, along with announcements that will affect savers and investors in the years to come.

So, if the State Pension becomes liable for Income Tax, you could begin taking more from other areas of your retirement income. In some cases, this could lead to a faster depletion of your reserves, potentially making things harder for you later in life.

Once again, though, it’s worth analysing how this would affect you and your circumstances rather than worrying in silence. You may find that this change is barely noticeable in the grand scheme of things, and that you’re still able to achieve what you want in retirement.

3. You may choose to defer your State Pension

Many retirees forget that the State Pension needs to be claimed; you won’t receive it automatically when you reach State Pension Age.

As such, you can choose not to claim your State Pension as soon as you’re able, and defer payments instead. If you do, you will receive more money once you start claiming your State Pension as you’ll be “catching up” with the available years you missed.

If the State Pension spills over into the Income Tax bracket, you could choose to defer it for later in your retirement. In essence, this means drawing more from your private pensions and other savings when you first retire, then scaling back your personal wealth withdrawals and claiming your deferred State Pension later.

This could even the playing field where Income Tax is concerned. However, whether or not a State Pension deferral would improve your Income Tax position will entirely depend on your circumstances – it’s important to seek clarification from a financial planner before proceeding.

Professional advice could help you work out your tax position and find solutions that work for you

The State Pension is just one piece of the puzzle when it comes to the Income Tax you may pay in retirement.

Remember, Income Tax may also be payable on:

• Withdrawals from your workplace pension pot
• Final salary (also known as defined benefit pension) income
• Rental income you receive from properties
• Certain types of investment income.

Plus, there are other forms of tax to think about. If you’re selling properties that are not your main home or shares you own outside of an ISA, you could incur Capital Gains Tax (CGT) on the sale. Or, if you’re receiving dividends in retirement, you may pay Dividend Tax.

With all this to consider (and more), it is worth having a professional assess your situation. This would ideally happen before you retire, but if you have already done so, it is never too late to speak with a financial planner and form a tax mitigation plan where possible.

Get in touch

To speak with a financial planner about Income Tax, your retirement plan, or any other financial matter, get in touch today.

Email info@depledgeswm.com or call 0161 8080200.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts and bases of, and reliefs from, taxation are subject to change and their value depends on an individual’s personal circumstances.

Workplace pensions are regulated by The Pension Regulator.

Your pension income could also be affected by the interest rates at the time you take your benefits.