The UK State Pension could exceed £20,500 a year by 2046 if annual increases continue under current assumptions, according to new analysis from investment platform IG. While higher payments could boost retirement income, the report also suggests that millions of pensioners may pay more income tax if the Personal Allowance remains frozen at £12,570. The findings are based on projections rather than government policy and illustrate how rising State Pension payments could increasingly become subject to tax over the coming decades.
The State Pension increases each year under the Triple Lock, which aims to protect pensioners’ incomes by raising payments in line with inflation, average earnings growth, or 2.5%, whichever is highest.
However, the income tax Personal Allowance has remained at £12,570. If that threshold does not increase while the State Pension continues to rise, more pension income could become taxable.
According to IG’s analysis, this could result in many pensioners paying income tax on part of their State Pension alone, even if they have little or no other taxable income.
Projections
The analysis models average annual State Pension increases of 2.5%.
| Tax Year | Projected Full New State Pension |
|---|---|
| 2026/27 | £12,548 |
| 2027/28 | £12,861 |
| 2031/32 | £14,196 |
| 2036/37 | £16,062 |
| 2041/42 | £18,173 |
| 2046/47 | £20,561 |
The report estimates that the State Pension would first exceed the current Personal Allowance during the 2027/28 tax year if the allowance remains unchanged.
Tax
As the State Pension rises above the Personal Allowance, a growing portion could become subject to income tax.
IG estimates the following potential tax outcomes if the Personal Allowance stays at £12,570.
| Tax Year | Pension Above Allowance | Estimated Annual Tax Bill |
|---|---|---|
| 2031/32 | £1,626 | £325 |
| 2036/37 | £3,492 | £698 |
| 2041/42 | £5,603 | £1,121 |
| 2046/47 | £7,991 | £1,598 |
These figures are based on modelling assumptions and should not be viewed as future government policy.
Scenarios
IG also examined how different Personal Allowance policies could affect future tax bills.
If the Personal Allowance increased once to £13,050 before remaining frozen, the report estimates that around £7,511 of the State Pension could still be taxable by 2046, creating an estimated annual tax bill of approximately £1,502.
In another scenario, where the Personal Allowance increased by roughly £300 every two years, around £4,991 of the State Pension could still become taxable by 2046, resulting in an estimated annual tax bill of about £998.
These examples demonstrate how changes to tax thresholds can significantly affect retirees’ after-tax income.
Triple Lock
The Triple Lock has helped increase State Pension payments over recent years by protecting pensioners against periods of higher inflation and wage growth.
However, the analysis suggests that higher pension payments combined with frozen tax thresholds could gradually increase the amount of pension income subject to taxation.
Aaron Bright, Investment Analyst at IG, said the situation creates a growing contradiction between rising pension payments and frozen tax thresholds, with more retirees potentially paying tax on increases intended to protect their standard of living.
Policy
The report notes that these projections are illustrative rather than predictions of future government action.
Future governments could:
- Increase the Personal Allowance.
- Change how the State Pension is taxed.
- Review or reform the Triple Lock.
- Introduce other tax measures affecting pension income.
Any future policy changes could significantly alter the projected tax outcomes.
Outlook
The analysis highlights a potential long-term issue rather than a confirmed policy change. If the Personal Allowance remains frozen at £12,570 and the State Pension continues to rise by an average of 2.5% each year, more pensioners could find part of their State Pension subject to income tax. However, future governments retain the ability to adjust tax thresholds, modify the Triple Lock, or introduce new policies that could change these projections before they become reality.
FAQs
Could the State Pension exceed £20,500 by 2046?
IG’s analysis projects it could reach about £20,561.
Will pensioners definitely pay more tax?
Not necessarily. The figures are projections, not policy.
Why could more State Pension become taxable?
Because the Personal Allowance may remain frozen.
What is the current Personal Allowance?
The current Personal Allowance is £12,570.
