DWP State Pension could top £20,500 by 2046 says new analysis

Research by investment platform IG estimates that, if the income tax Personal Allowance remains frozen at £12,570, the full new State Pension could rise to £16,062 a year by 2036, leaving £3,492 subject to income tax. By 2046, almost £8,000 of the State Pension could be taxable, creating an annual tax bill of around £1,598.

The projections highlight the growing gap between the Triple Lock, which increases the State Pension each year, and income tax thresholds, which have failed to keep pace.

What the analysis suggests could happen if the Personal Allowance remains frozen at £12,570

• 2027/28: The full new State Pension is forecast to exceed the £12,570 Personal Allowance, meaning some pensioners could begin paying income tax on part of their State Pension if they have no other allowances available.
• 2031/32: Full State Pension reaches £14,196 a year, with £1,626 potentially taxable, creating an estimated £325 annual tax bill.
• 2036/37: Full State Pension rises to £16,062, leaving £3,492 above the Personal Allowance and resulting in an estimated £698 tax bill.
• 2041/42: Full State Pension reaches £18,173, with £5,603 potentially taxable, equating to an estimated £1,121 tax bill.
• 2046/47: Full State Pension climbs to £20,561, leaving £7,991 subject to income tax and creating a potential £1,598 annual tax bill.

Alternative scenarios modelled by IG:

• If the Personal Allowance increased by a one-off £480 to £13,050 before freezing, pensioners could still have £7,511 of their State Pension taxed by 2046, resulting in an estimated £1,502 tax bill.
• If the Personal Allowance rose by around £300 every two years, broadly in line with historic increases, around £4,991 of the State Pension could still become taxable by 2046, leading to an estimated £998 annual tax bill

Aaron Bright, Investment Analyst at IG, said: "The Triple Lock has played an important role in protecting pensioners' incomes over the past decade, but it is beginning to expose a growing contradiction in the system. As the State Pension rises, more of those increases risk being pulled into the income tax net.

"That creates what is effectively a retirement stealth tax. Pensioners are promised inflation-linked increases to help protect their standard of living, only for a growing share of those increases to be eroded through taxation.

"The government will now increasingly face a choice - accept that more State Pension income becomes taxable, continue making ad hoc changes to prevent that happening, or review how the Triple Lock operates over the longer term. As this issue becomes more pronounced over the coming years, that debate is only going to become more important."

The projections are based on modelling rather than government policy and assume continued annual State Pension increases averaging 2.5%.

Future governments could choose to increase the Personal Allowance or change the way the State Pension is taxed, meaning the figures are illustrative rather than a prediction of future policy.

Projected full new State Pension

(assuming average annual increases of 2.5%)

• 2026/27: £12,548
• 2027/28: £12,861 (first year projected to exceed the £12,570 Personal Allowance)
• 2028/29: £13,183
• 2029/30: £13,512
• 2030/31: £13,850
• 2031/32: £14,196
• 2032/33: £14,551
• 2033/34: £14,915
• 2034/35: £15,288
• 2035/36: £15,670
• 2036/37: £16,062
• 2037/38: £16,464
• 2038/39: £16,875
• 2039/40: £17,297
• 2040/41: £17,729
• 2041/42: £18,173
• 2042/43: £18,627
• 2043/44: £19,093
• 2044/45: £19,570
• 2045/46: £20,059
• 2046/47: £20,561