The State Pension is on course for another increase next April. But with tax allowances currently remaining frozen, a higher pension could also mean a higher tax bill for some retirees.

Latest earnings figures from the Office for National Statistics showed annual growth in total pay of 3.9% for the three months to July 2026. Under the State Pension triple lock, pensions rise by the highest of average earnings growth, September inflation or 2.5%.

If 3.9% proves to be the highest of these measures, the full new State Pension would rise from £241.30 to around £250.70 a week from April 2027. This is equivalent to approximately £13,000 a year, taking it above the standard £12,570 Personal Allowance.

The final increase is not yet confirmed and will depend on September’s inflation figure. However, the prospect highlights an increasingly important issue for retirement planning: the interaction between rising pension income and frozen tax thresholds.

The State Pension is taxable

Although tax is not deducted before the State Pension is paid, it counts towards taxable income.

For someone receiving other taxable income; perhaps from a workplace or personal pension, employment, savings or property, the State Pension uses an increasing proportion of their Personal Allowance.

If the full new State Pension rises above £12,570, someone receiving it could effectively have their standard Personal Allowance used by their State Pension alone.

Where someone also receives income from a private or workplace pension, HMRC will usually collect tax due by adjusting the tax code applied to that other income.

The Government has said it intends to prevent a narrowly defined group of pensioners whose sole income is the basic or new State Pension, without increments, from having to pay small amounts of tax through Simple Assessment from 2027/28 if the State Pension exceeds the Personal Allowance. Further detail on how this will work is still to be provided.

For those with other retirement income, however, the interaction between rising pensions and frozen allowances remains important.

Why looking at all your retirement income matters

Most people’s retirement income does not come from a single source.

Alongside the State Pension, you might have defined benefit pensions, personal or workplace pensions, ISAs, savings, investments, property or other sources of income. Each can be treated differently for tax purposes.

That makes the way these assets and income sources are used increasingly important.

Depending on individual circumstances, there may be flexibility around how much taxable pension income is taken in a particular year, when withdrawals are made, whether income is drawn from pensions or tax-efficient investments such as ISAs, and how assets and income are structured between spouses or civil partners.

For some people, relatively small changes to the timing or source of withdrawals can make a difference to their overall tax position.

The objective, however, should not simply be to pay the least tax possible in a single year.

Good retirement planning considers the longer term: how much income you need, where it should come from, the tax implications, how your investments are positioned and whether your assets are likely to remain sustainable throughout retirement.

Financial planning is about the whole picture

The potential State Pension increase is a useful example of why financial planning should not consider pensions, investments and tax in isolation.

Changes to one part of your finances can have consequences elsewhere, particularly as your circumstances evolve through retirement.

For clients with more complex affairs, this can also mean working collaboratively with accountants, solicitors and other professional advisers so that financial, tax, legal and estate planning considerations are considered together.

At Craven Street Wealth, we believe good financial planning starts with understanding what matters to you and what you want your wealth to achieve. Regularly reviewing the whole picture can help ensure your retirement income remains appropriate, sustainable and tax-efficient as both your circumstances and the rules around you change.

How we can help

If you are approaching retirement or already drawing an income, reviewing how your State Pension, private pensions, savings and investments work together can help you understand whether your arrangements remain appropriate.

One of our Financial Planners can help you consider your retirement income as part of your wider financial plan and, where appropriate, work alongside your other professional advisers.

Contact us on  0330 320 9280, email info@cravenstreetwealth.com or complete our online enquiry form  for practical advice tailored to your own circumstances and needs.

Sources:

Office for National Statistics (ONS): https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours?

Department for Work and Pensions / GOV.UK: https://www.gov.uk/government/publications/benefit-and-pension-rates-2026-to-2027?

HM Revenue & Customs / GOV.UK: https://www.gov.uk/guidance/how-your-state-pension-is-taxed?

HM Revenue & Customs / GOV.UK: https://www.gov.uk/government/publications/rates-and-allowances-income-tax/income-tax-rates-and-all…

HM Revenue & Customs / GOV.UK: https://www.gov.uk/tax-on-pension?

The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.

References to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of publication. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.

 You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.

Craven Street Financial Planning Limited is authorised and regulated by the Financial Conduct Authority (FCA). The FCA does not regulate tax advice.