The state pension will be inches away from being taxed when pensioners get an inflation-busting 4.8 per cent rise from next April thanks to the triple lock.

CPI inflation stuck at 3.8 per cent for the third month in a row in September, today’s ONS data shows.

Next April's increase is set by the triple lock, the Government pledge which means the state pension is increased each year in line with the highest of three figures: inflation, average wage growth or 2.5 per cent. 

With inflation at 3.8 per cent, wage growth is the metric that will determine the state pension increase. It will rise in line with average earnings growth between May and July, which was recently revised up to 4.8 per cent.

But with income tax thresholds frozen, the rise means that people who rely on the full, new state pension as their sole income just £22.40 under the threshold for paying income tax.

The full new state pension is likely to increase to around £12,547.60 next April, from £11,973 currently.

However, it also means retirees who rely solely on the state pension are being dragged ever closer to paying income tax, as the threshold for that is just £22.40 higher at £12,570.

Many pensioners are already taxed

With the state pension taking pensioners to the edge of being taxed, other income will take many above the £12,570 personal allowance. Work and private pension income, savings interest and dividends are also subject to income tax. 

For amounts between £12,571 to £50,270 the rate of income tax is 20 per cent. For amounts between £50,271 to £125,140 the rate of tax is 40 per cent while the additional rate of 45 per cent is payable for amounts over £125,140. 

Dividend earnings outside the personal allowance are included for income tax purposes, but there is a dividend tax allowance of £500 for the 2025/26 tax year. 

An additional allowance called the Personal Savings Allowance (PSA) means you can earn £1,000 interest on your savings if you are a basic rate tax payer even if this takes you above the personal allowance. If you are a higher rate tax payer this allowance is halved to £500 while additional rate taypayers have no PSA. 

With private or workplace pensions, you can usually take up to 25 per cent of the amount built up as a tax-free lump sum, up to £268,275. 

However, it has been speculated that this allowance could be changed in the Budget on 26 November. 

If someone takes an annuity and that income pushes them above their personal allowance, it can be taxable. 

How much would a pensioner who just exceeded the limit pay in income tax?

Even a relatively small rise in the state pension in the 2027-28 and beyond could push those who get the full, new state pension over the income tax threshold. 

The full, new state pension is received by people retiring since 2016 if they qualified by paying enough National Insurance during their working life.

People who retired before April 2016 on the full basic state pension will see their weekly payment rise to £184.90, rather than £184.75. 

However, older people on the basic rate also get top-ups, called S2P or Serps, if those were earned earlier in life.

That can already push their state pension well above the personal allowance threshold, with some already having to pay an income tax bill.

A pensioner who just exceeded their limit would pay tax on anything over £12,570. 

If a pensioner’s total income is £12,571, they would pay 20 per cent tax on just £1, which equals £0.20. 

The UK income tax system is marginal, so only the amount above the Personal Allowance is taxed, at 20 per cent for income up to £50,270.

How will you be taxed if you exceed the limit, do you have to do a tax return?

You may not have to do a tax return if you go over the limit in the first instance. 

HMRC uses a system called Simple Assessment for pensioners with straightforward tax affairs. If your income exceeds the Personal Allowance and tax can’t be collected via PAYE, HMRC will send a letter with the amount owed. There will be no need to file a full Self Assessment tax return unless you have more complex income, for example if you have rental income, large dividends, or capital gains. 

However, if you do have untaxed income over £2,500, or multiple income sources, HMRC may require you to file a Self Assessment. 

Is it worth slightly reducing your income to go back under the limit?

Whether it’s worth reducing your income to stay below the income tax threshold, or more significantly, the higher-rate threshold, depends on your overall financial position and how far over the line you are. 

For pensioners just above the basic-rate threshold of £12,570, the tax impact is relatively minor, as only the income above that level is taxed at 20 per cent. 

However, once total income exceeds £50,270, you enter the higher-rate band, where income is taxed at 40 per cent.

Jon Greer, head of retirement policy at wealth manager Quilter explains: 'This shift can have broader consequences beyond just the increased rate on pension income. 

'Crossing into the higher-rate band can reduce or eliminate other allowances. For example, the Personal Savings Allowance drops from £1,000 to £500, meaning more savings interest becomes taxable. 

'While Dividend income above the £500 allowance is taxed at 33.75 per cent, compared to 8.75 per cent for basic-rate taxpayers. Capital Gains Tax also increases from 18 per cent to 24 per cent on most assets. These changes mean that even a small step over the threshold can result in a disproportionately large tax increase across multiple income streams.'

Some pensioners may consider reducing income, such as adjusting pension drawdowns, deferring annuity payments, or restructuring investments, to avoid tipping into the higher-rate band. 

Holding investments in an Isa or pension can help shield income from tax. Additionally, higher-rate taxpayers can claim up to 40 per cent tax relief on pension contributions, which may help offset some of the impact.

Mr Greer says: 'For some, the benefits of additional income may outweigh the tax cost. For others, careful planning could help preserve allowances and reduce overall tax exposure.'

Will the income tax allowance go up any time soon?

The freeze on income tax thresholds have been in place since 2022 under the former Conservative Government. 

In the last Autumn Budget in October 2024, the Government said the income tax allowance will be kept frozen at £12,570 until at least 2028. 

And there is speculation it could even extend this freeze in next month's Autumn Budget. 

David Brooks, head of policy at leading independent pensions consultancy Broadstone, added: 'As we head towards winter, the news will be positive for those pensioners who rely on the state pension to provide the majority of their income.

'It is bad news for the Chancellor, who will have to fund the increased cost of providing this benefit to pensioners next year.'