New state pension breaches tax allowance for first time – but only 1 in 16 pensioners will benefit from Government’s income tax ‘amnesty’

Today’s figures on average earnings growth from the ONS show that total pay grew by 3.9% between May-July 2025 and May-July 2026.

Unless price inflation rises very sharply in the next two months from its July rate of 2.9%, it is the average earnings growth figure which will be the higher of the two and therefore will determine the increase in the new state pension and old basic state pension next April.

Note that today’s figure is a provisional estimate and therefore is potentially subject to (usually minor) revision next month.

If earnings growth next month is unchanged on today’s figure, with a new state pension currently at £241.30, an increase of 3.9% would add £9.40 per week to the state pension taking it to £250.70, an increase of just under £500 per year.

The way in which the state pension is taxed is by taking one week at the old rate - £241.30 and 51 weeks at the new rate £250.70. Added together, this gives £13,027 per year. Someone wholly dependent on the new state pension could therefore pay tax of 20% of the excess over the personal allowance or £91.40.

However, the Government has said that a narrowly defined group of pensioners – those wholly dependent on the new state pension (with no private pension) or the old ‘basic’ pension, ‘with no increments’, will not have to pay tax. The Government has not yet set out how this will work. But based on the policy as described to date, LCP analysis suggests that just 1 in 16 pensioners may benefit from this concession.

For pensioners on the old state pension system, the current basic pension is £184.90 and this could rise to £192.10, an increase of around £374 per year. Such pensioners would also receive an inflation-linked increase on any ‘additional’ state pension that they receive (such as SERPS / State Second Pension).

We will not know the final inflation figure to be used until we have the September CPI, published in October. However, the latest rate of CPI was just 2.9% in the year to July. The August figure will be published on Thursday.

In March, alongside the Spring Statement, the OBR published its latest Economic and Fiscal Outlook which assumed a ‘triple lock’ increase on the state pension of 3.7% next year. An increase of 3.9% would therefore be slightly higher than expected.

Commenting, Steve Webb, partner at pension consultants LCP said: “Under the triple lock formula, the new state pension will rise next April by the highest of the growth in wages, prices or 2.5%. Based on today’s figures, it is highly likely that it will be average earnings growth which comes out on top. Those on the new state pension can expect to see an increase of nearly £500 per year next April. But the sting in the tail is that this will take the standard rate of the new state pension above the tax threshold. The Government’s plans to address this point are a mess, and likely to benefit only a small fraction of pensioners. They will also create unfairness between different groups of pensioners and between pensioners and low-paid workers, who do not qualify for any exemption.”