Income tax blow for retirees who delayed state pension

People putting off their state pension to earn a little extra are likely to see it taxed under new rules, according to analysis.

The state pension is set to grow larger than your personal allowance from next year, meaning some of it will be subject to income tax.

The government has promised an exemption for people who rely on the state pension as their source of income, but it appears this will not include those who delayed taking it in order to benefit from an "increments" scheme that increases payments by 5.8% for each deferred year.

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"It seems that those who have taken this decision could be penalised," says former pensions minister Steve Webb, now a partner at pension consultants LCP.

"Those with 'increments' on top of their state pension are likely to miss out on the government's new tax waiver for those wholly dependent on the state pension. This could cost them hundreds of pounds in the coming years."

It is not yet clear by exactly how much the state pension will outstrip the UK's £12,570 personal allowance (below which no income tax is paid).

The state pension "triple lock" means it will rise by either 2.5%, the rate of CPI inflation (currently 4.1%) or the rate of average wage growth (currently 2.9%), whichever is highest.

Wage growth looks likely to be the winner, barring any unexpected events before September, which is the end of the inflation data period taken into account.

Should the rate remain at 4.1%, that would mean a state pension of £13,062 next year, of which £492 would potentially be subject to income tax.

Those who have delayed their pension would have a higher tax bill still.

The Money team understands the Treasury will set out further details on the matter in due course.

A Treasury spokesperson said: "Pensioners whose only income is the full new or basic state pension without any increments will not pay income tax and we are committed to that over this Parliament.

"By keeping the triple lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from one of the most generous personal allowances in the G7."

(c) Sky News 2026: Income tax blow for retirees who delayed state pension