Budget 2025 - State pension to rise 4.8% for 2026/27 in line with triple lock

The Chancellor of the Exchequer in her Budget speech today confirmed that the state pension will rise 4.8 per cent for the 2026/27 financial year, as determined by the triple lock mechanism.

The full new state pension will increase by about £570 a year, she said - for people who reached the state pension age after April 6 2016. Those who retired before then on the full basic state pension will get a lower increase.

Lucie Spencer, Partner in Financial Planning at wealth management firm Evelyn Partners, comments:

‘The triple lock headlines disguise a wide range of circumstances for today’s pensioners. For a start, only one in three (36%, or 4.7million) pensioners get the full new state pension.

‘The reality is that pensioners receive not “the state pension” but a dizzying array of different payouts depending on when they reached state pension age, whether they had opted out of  the old system, and whether they had accumulated enough National Insurance Contributions (35 years contributions if you retire after 6th April 2016), to name just a few of the variables.

‘This means that millions of pensioners will not be receiving the estimated full new SP payout of about £12,540 in 2026/27 which is often portrayed as a headline rate. Generally speaking the older you are the more likely it is your state pension will be less than this, and sometimes substantially so.

‘But the real differences are between those who have private pensions or other savings that supplement their state pension, and those who don’t. No one finds it particularly easy to live on the state pension alone, and it’s one of the big public policy predicaments of our time that even though for most retirees the state payout is inadequate to rely upon, it’s also reckoned to be fiscally unsustainable in its current form.

‘While the politicians and civil servants sort that one out, or don’t, those yet to reach retirement might want to take matters into their own hands – if they can of course – and start saving as much as their means allow.

‘As for income tax, the personal allowance freeze at £12,570 – which was also extended to 2029/30 today – does mean more state pensions will be taxed and that will accelerate in 2027/28 and subsequent years.[1] You won’t find many pensioners complaining about triple lock increases because of this, although plenty would argue that the personal allowance should be raised to remove the anomaly.

‘What concerns most people is how it will be taxed – at source or will state pensioners have to tackle the quite daunting self-assessment process? Currently the state pension will always be paid gross.

’If you have other PAYE income (e.g., from a private pension or employment), then HMRC will usually adjust the tax code on that income so that tax due on your state pension is collected through PAYE.

‘If the state pension is your only income and exceeds the Personal Allowance, then HMRC will usually issue a Simple Assessment after the tax year ends, telling you how much tax you owe and how to pay it.

‘If you have other income not taxed via PAYE (e.g., rental income, or from self-employment), then you may need to complete a self-assessment tax return.’

[1] LCP estimated the extra two-year freeze means at least 9.3mn pensioners paying tax, around three quarters of all pensioners, compared with around 8.7mn today. This is also up from 6.7mn in 2021/2022. If inflation or wage growth picks up in the coming years, leading to larger state pension rises, it could mean 10mn pensioners paying income tax by the end of the decade.