A potential State pension tax row is brewing ahead of the Spring Statement, with Chancellor Rachel Reeves under pressure to prevent millions of retirees from being dragged into paying income tax.
The fiscal update, due on 3 March 2026 in Westminster, could address growing concerns that frozen tax thresholds will create an HMRC headache for pensioners from April 2027.
Experts warn that without a clear “carve out”, some Britons relying solely on the state pension may face unexpected tax bills.
The issue centres on fiscal drag, frozen personal allowances, and the rising value of the state pension under the triple lock.
Why could the State pension tax become a problem from 2027?
The personal allowance, the amount you can earn before paying income tax, remains frozen at £12,570 until 2031.
At the same time, the state pension continues to rise each year under the triple lock. From April 2026, payments are set to increase by nearly 5 per cent.
That means the full new state pension is edging closer to the £12,570 tax-free threshold. If it rises above that level, pensioners relying solely on the state pension could technically owe income tax, despite having no other income.
This situation is known as fiscal drag. In simple terms:
- Tax thresholds stay the same
- Income rises with inflation or wage growth
- More people get pulled into paying taxes
There is no real increase in wealth, but the tax bill appears anyway.
What has Rachel Reeves promised on the State pension tax?
Labour has pledged that pensioners who rely only on the state pension will not pay income tax when payments exceed the personal allowance from April 2027.
The Chancellor confirmed this protection would remain until the end of Parliament in 2029. However, the Government has not yet explained how it will work in practice.
Tom Selby, director of public policy at investment platform AJ Bell, said: “It was another announcement that came with little detail at the time, and the government will at some point need to confirm how it plans to implement the measure.
Reeves may sniff an opportunity to talk up the government’s continued commitment to the triple lock, with the state pension set to rise almost five per cent in April, so we could see some detail on the tax carve-out.”
Without a formal exemption mechanism, HMRC would need to process small tax bills for millions of pensioners, something analysts warn could create major administrative strain.
How many pensioners could be affected?
The UK currently has more than 12 million state pension recipients.
If the full new state pension surpasses £12,570 by 2027, a significant proportion could technically fall within the income tax system, even if the tax owed is small.
Last year’s Budget suggested some pensioners would avoid filing Self Assessment returns. Instead, HMRC may rely on its Simple Assessment system. But experts say the system could struggle under scale.
Maike Currie, vice president at pension provider PensionBee, warned: “Would someone with just £1 of private pension income face tax when their neighbour on the same income from the state pension pays nothing?
Without a clear, fair and fully costed plan, including how HMRC will handle Simple Assessments for millions of pensions, the Government risks replacing one problem with another: a messy, unfair system full of exemptions.”
Could the State pension tax carve-out create inequality?
Experts highlight several complications:
1. Small private pensions
Someone receiving £12,569 in state pension plus £1 from a private pension could technically become taxable.
2. Older pension schemes (SERPS)
Those who receive payments under the previous system or SERPS already settled tax through the Simple Assessment.
3. Working-age comparison
An employee earning £12,500 must pay National Insurance, even if income tax is minimal. A pensioner earning the same amount pays no National Insurance. This raises questions about fairness across generations.
What is fiscal drag?
Fiscal drag occurs when tax thresholds stay frozen while incomes rise with inflation.
The personal allowance freeze to 2031 was originally introduced under the previous government to stabilise public finances. However, rising wages and the triple lock now mean more pensioners risk entering the tax net.
The Conservatives previously proposed a “triple lock plus”, which would have increased the personal allowance specifically for pensioners, but that policy did not progress.
What could happen in the Spring Statement?
The Spring Statement on 3 March is expected to focus on economic forecasts rather than major new policies.
However, analysts believe Rachel Reeves may use the moment to:
- Reaffirm the triple lock commitment
- Outline how the State pension tax exemption will operate
- Provide clarity on HMRC administration
What does this mean for UK pensioners?
If the Government confirms a clear carve-out, pensioners relying solely on the state pension should avoid income tax from 2027.
If not, many could face:
- Unexpected tax letters
- Small but confusing bills
- Greater HMRC contact and paperwork
Clarity matters because uncertainty alone can cause anxiety among retirees living on fixed incomes.
