Following the Labour Party's Autumn Budget, the government has issued a crucial statement clarifying the income tax position for millions of state pensioners across the UK. This comes as the State Pension is projected to increase by a significant 4.8 per cent in April.
Tax-Free Pension Boost for Next Year
In a written response to a parliamentary question from Freddie van Mierlo, the Liberal Democrat MP for Henley and Thame, the government provided clear reassurance. The basic and full new State Pension will not be subject to income tax during the 2025/26 financial year.
Dan Tomlinson, the Labour MP responding for the government, stated: "The Government is committed to making sure older people can live with the dignity and respect they deserve in retirement." He emphasised that the State Pension is the foundation of support for retirees and confirmed that the Personal Allowance will continue to exceed the value of the full State Pension next year.
The Looming Shadow of Fiscal Drag
While the news for the immediate future is positive, a longer-term financial pressure is building for pensioners. The central issue revolves around the personal income tax allowance, which remains frozen at £12,570 until 2028.
This freeze creates a phenomenon known as 'fiscal drag'. As the State Pension rises each year with inflation—projected to increase by around £1,900 over this Parliament—but the tax-free threshold stays the same, more and more retirees will find their income creeping over the limit.
Currently, a 20 per cent basic tax rate applies to earnings above £12,570. With both this threshold and the higher-rate threshold of £50,270 frozen since 2021, individuals who receive income in addition to their state pension, even modest amounts, are increasingly likely to be pulled into the tax net.
What This Means for Retirees
The government's statement offers short-term certainty. Pensioners whose only source of income is the full new or basic State Pension will not pay any income tax in the 2025/26 year.
However, the ongoing freeze on the personal allowance means that this annual reprieve may become less certain for some in the years ahead. Each successive State Pension increase, while vital for maintaining living standards, brings a larger number of pensioners closer to the static tax threshold, highlighting the enduring impact of fiscal drag on retirement finances.
