A post on TikTok claimed that HMRC is warning pensioners of a £130 deduction to the monthly state pension. It also suggests that the Government is “trying to lessen pension amount also”.
Evaluation
There were no plans to reduce either the basic or full state pension in the most recent Budget and there has been no suggestion from the Government that there will be in future. The Government has said that it is committed to the so-called triple lock, which commits it to increasing the state pension every year.
Some experts have raised concerns that frozen tax thresholds may increase the number of pensioners paying income tax, but these figures are speculative and have not been issued as guidance by HMRC. The figure of £130 in these projections is also an annual figure of income tax, rather than a deduction per month.
Additionally, tax thresholds are set to be unfrozen from the 2028/29 financial year.
The facts
The amount paid in the UK state pension increases every year under a mechanism known as the “triple lock”, uprating it by the percentage of inflation, the average increase in UK earnings, or 2.5% – whichever is the highest. The policy was introduced by the Conservative-Lib Dem coalition, and took effect from 2011. In the 2024 election, both of those parties campaigned to keep it, as did Labour.
As the amount paid out by the state pension increases, however, it has been growing closer to the personal allowance – the amount of income a person can receive before they must starting paying income tax. This is currently set at £12,570 a year for most people and has been frozen at that level since 2021. That freeze is set to expire in the 2027-28 fiscal year.
If a person’s wages or pension rises from below this threshold – currently £12,570 – to above it, they will start paying income tax on the money they earn above the threshold. So if they earn £13,000 they will pay tax on £430 of their earnings.
Freezing the tax threshold means that, if a person’s pension or wage increases, people can end up finding themselves moving beyond a threshold without any real change in circumstances. This is known to economists as fiscal drag.
Although no major political party is advocating for a reduction in the amount paid to pensioners by the state, some experts have suggested more pensioners could get caught in this fiscal drag. This is based on projections of how much pensions could increase over the coming years, and assumes that the income tax personal allowance remains unchanged. Those affected would then have to pay HMRC 20% of their income above the threshold, which is the basic rate of tax.
Many people with private pensions already find themselves over the personal tax allowance and are therefore liable to pay income tax. The Institute for Fiscal Studies has estimated that 62% of those over 65 were paying income tax in 2022-23.
From April next year both the basic and new state pensions will be increased by 4.1%, as confirmed by Chancellor Rachel Reeves in the Budget. This will increase the maximum amount paid by the new state pension from the current £11,502.40 (£221.20 a week for 52 weeks) to £11,973.00 (£230.25 a week for 52 weeks).
If a similar rise of 4.1% were repeated for 2026/27, it would rise to around £12,464 a year, just below the personal allowance threshold. If the 4.1% increase were maintained to 2027/28, it would reach £12,975, requiring everyone on the full state pension to pay back a small amount of it in income tax. To continue this projection, it would then reach £13,507 in 2028/29 and £14,061 in 2029/30.
The state pension alone would need to reach a level of £20,370 a year to be so far over the allowance that £130 per month would be owed to HRMC from the state pension.
The likely source of the £130 figure quoted in the TikTok post is calculations by the wealth management company Quilter, seen by the PA news agency. By increasing the full state pension by the triple lock’s minimum of 2.5%, and rounding it up to the nearest 5p, this would equal a weekly full state pension by the year 2029/30 of £254.25 – £13,221 over 52 weeks.
At £671 over the current personal allowance, this would equate to £130.20 income tax at the basic rate for the whole year. However, this calculation does not account for the tax thresholds being unfrozen, lessening the effect of fiscal drag. In her Budget speech, Ms Reeves also said that “from 2028-29, personal tax thresholds will be uprated in line with inflation”. Given that pensions must, under the triple lock, rise equal to or higher than inflation, this could still see pensions rising above the annual personal allowance.
The Conservative manifesto pledged to institute a triple lock mechanism on the personal allowance of pensioners only to combat this issue.
Links
State Pension triple lock – House of Commons Library (archived)
The Conservative and Unionist Party Manifesto 2024 (archived)
For a Fair Deal – Liberal Democrats Manifesto 2024 – Liberal Democrats (archived)
Break down barriers to opportunity – The Labour Party (archived)
Income Tax rates and Personal Allowances : Current rates and allowances – GOV.UK (archived)
Fiscal drag: An explainer – House of Commons Library (archived)
One in five pensioners will be ‘dragged’ into paying higher rate tax | Money Marketing (archived)
Policy risks to the fiscal outlook | Institute for Fiscal Studies (archived)
Autumn Budget 2024 speech – GOV.UK (archived)
Autumn Budget 2024 (HTML) – GOV.UK (archived)
The impact of frozen or reduced personal tax thresholds – Office for Budget Responsibility (archived)
