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This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on this information to make any decisions, and consider seeking independent professional advice. All figures and information in this article are correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.
The state pension is going up in April – and so is the risk of an unexpected tax bill. New research shows millions of people still don’t realise the state pension counts as taxable income, and with frozen allowances pulling more retirees into the net each year, many could be caught out without warning.
Here’s what you need to know before the new tax year begins.
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According to new research from Royal London, 41% of adults are unaware that the state pension is liable for income tax. This lack of knowledge, combined with frozen tax thresholds, is creating a perfect storm for the 2026/27 tax year.
With the cost of living still a major concern, every penny counts. Yet, as the new tax year approaches next month, many pensioners may find themselves dragged into the tax net for the first time – or pushed into a higher bracket – simply for receiving the rise they were promised.
The core of the issue lies in ‘fiscal drag’. In the November 2025 budget, the chancellor confirmed that the personal allowance – the amount of income you can earn before paying tax – will remain frozen at £12,570 until April 2031.
At the same time, the state pension is rising. From April 2026, the full new state pension will jump to a level that leaves a buffer of less than £30 before it hits that £12,570 tax-free limit.
This means if you have even a tiny amount of additional income – such as a small private pension, earnings from part-time work, or unsheltered savings interest above your allowance and outside of an ISA – you’ll almost certainly exceed the personal allowance.
Alex Edmans, product director at Saga Money, says: “We often view the state pension as a guaranteed safety net, but in the eyes of the taxman, it is simply income.
“No-one likes to get an unexpected tax bill. The key is to treat your state pension as the foundation of your taxable income, not a tax-free bonus.”
In the November Budget, the chancellor announced that the government would ensure “that people only in receipt of the basic or new state pension do not have to pay small amounts of tax through simple assessment from April 2027.” There are estimated to be between 800,000 and 1 million pensioners whose only income is the state pension, although this may include people who receive some additional state pension, who won't qualify for this exemption.
A recent research report from the House of Commons Library has highlighted confusion about this announcement. The report quotes the charity The Low Incomes Tax Reform Group (LITRG), which said: “Some commentators interpreted the announcement as purely administrative, aimed at reducing the administrative burden of budgeting for and paying tax in arrears via simple assessment but not changing the amount of tax due […] We initially thought that the government might be considering our suggestion of applying PAYE to the state pension.”
But the Exchequer Secretary Dan Tomlinson made it clearer in the House of Commons in January that the intention is that “those whose only income is the basic or new state pension, without any increments, will not have to pay income tax over this parliament.”
The LITRG has called for more detail about how the state pension tax waiver will work and how much it will cost.
A senior HMRC official, Cerys McDonald, reassured the Treasury select committee in January that work is under way, although legislation will be needed to make the waiver happen. She said: “There is clearly a lot of detail to still work through. We are working hand in glove with the Treasury on these options to make sure that the final decision is operable from April 2027...We would expect this to go through the next Finance Bill in the autumn, but we have mobilised a project team already in anticipation of needing to make this change.
“The mechanism that we would normally use without a mitigation to recover this tax is simple assessment. Normally, we would not be processing that for 2027/28 until after the end of the 2028 tax year. We have a decent run-in here. I am not worried about delivery timescales.”
It often comes as a surprise that the state pension is liable for income tax, but this has been the case since its introduction in 1946. This was reviewed in 2012-13 by the Office for Tax Simplification, and it was decided to maintain the situation to avoid creating a hole in the public finances and also because better-off pensioners would benefit the most. At that time, only around half of pensioners paid income tax.
Tax on the state pension used to be less of an issue because the personal allowance rose in line with inflation, keeping the state pension well below the threshold. However, the decision to freeze the personal allowance at 2021/22 levels until 2031 has broken that link.
The result is that the number of pensioners paying income tax has risen sharply. Government figures show a jump from 6.47 million in 2020/21 to a forecast 8.72 million in 2025/26. That number is set to climb further as the freeze continues through the rest of the decade. It’s predicted that 76% of pensioners will pay income tax by 2032.
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One of the biggest misconceptions is how this tax is collected. The state pension is paid untaxed by the Department for Work and Pensions (DWP). They do not deduct tax at source before paying you. That’s different to other pensions, where tax is deducted first.
If you have a private or workplace pension, HMRC will usually adjust your tax code to deduct the tax owed on your state pension from your private pension payments.
A growing number of people have a state pension that exceeds their personal allowance, but no private pension income to collect the tax from. In these cases, HMRC uses a system called simple assessment.
Under simple assessment, HMRC calculates what you owe based on data they receive from the DWP and banks. You will then receive a calculation in the post (usually a P800 or PA302 form) telling you exactly how much you owe. This bill must be paid directly to HMRC, usually by January following the end of the tax year.
For many pensioners, receiving a direct demand for payment can be stressful and confusing.
Sarah Pennells, consumer finance specialist at Royal London, says: “The fact that approximately 4 in 10 adults do not know the state pension is taxable is not surprising as it’s paid without tax being taken off. However, from April, the full new state pension will be less than £30 below the personal allowance, so it’s more important than ever that people understand what tax they may have to pay.
“Most of those over state pension age who paid tax (88%) expected to do so, but 12% didn’t. The average amount of tax paid was over £4,500 but the majority (66%) didn’t know how much tax they’d paid or couldn’t remember.”
Don’t assume you are safe if you are on the ‘old’ state pension. While the basic rate is lower than the new state pension, many retirees receive ‘top-ups’ through the additional state pension (formerly SERPS).
Sarah Pennells adds: “Some pensioners who built up a larger state pension under the old system, thanks to the state earnings-related pension scheme (SERPS), will already be paying tax even if they have no other income in retirement.”
If your total income – combining your basic state pension, additional state pension, and any other sources – crosses the £12,570 line, the taxman will be in touch.
You can’t avoid tax that is legally due, but you can avoid overpaying or getting a nasty surprise.
1. Check your tax code immediately
If you have a private pension, check your P60 or your HMRC online account. Ensure your tax code correctly reflects your state pension amount. If HMRC estimates your state pension is lower than it actually is, you will underpay tax now and face a demand for the difference later.
2. The marriage allowance lifeline
If you are married or in a civil partnership, and one of you earns below £12,570 while the other pays tax at the basic rate, you can transfer £1,260 of your personal allowance to your partner. This can save you up to £252 a year in tax.
3. Use your ISA wrappers
Income from ISAs is tax-free and does not count towards your personal allowance. If you are drawing income from a flexible private pension and getting taxed, consider if you can draw from your ISA savings instead to keep your taxable income below the £12,570 threshold (or the higher rate threshold).
4. Review defined benefit schemes
As Sarah Pennells says: “If you have a defined benefit pension, your pension scheme should tell you each year how much your payments are going to be.” Add this figure to your annual state pension forecast to see if you are about to breach a threshold.
5. Consider deferral (carefully)
If you are still working and don’t need the state pension yet, you can defer claiming it. This stops it from being added to your taxable employment income for now. However, when you do eventually claim it, the amount will be higher, potentially pushing you into a higher tax bracket later.
Alex Edmans says: “Knowledge is your best defence. We’re seeing not just a rise in tax payable, but a rise in complexity. Whether you use the government’s online tools or speak to a financial adviser, a ten-minute ‘health check’ on your tax position this March could save you hundreds of pounds.”
Saga has partnered with HUB Financial Solutions, who can help you find the right annuity for you from the whole of market. If you take out an annuity using their service, Saga Money will earn a commission.
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