Can this solve the State Pension tax dilemma?

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The question is - what, if anything, should be done to avoid this? Your suggested solution is to tie the full State Pension and the Personal Allowance together, then raise them by the same amount. That would solve the issue of the State Pension exceeding the Personal Allowance. But what other challenges would such a reform face?

The first is that the successive governments have become quite fond of not increasing the Personal Allowance as a stealthy way to raise tax - and raise lots of it. That happened first under Rishi Sunak’s Conservatives in 2021 but was continued and extended under Keir Starmer’s Labour in 2024. The Personal Allowance, and other thresholds for income tax, have been frozen until 2031.

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The Office for Budget Responsibility has forecast that the freeze in tax thresholds (both the Personal Allowance and the 40% higher-rate threshold) will bring in an extra £66.6bn by 2031.¹ So inflation-linking the Personal Allowance would first mean a significant tax cut that the government would have to budget for.

A second challenge is choosing whether to raise the State Pension and Personal Allowance by inflation or wage growth. Limiting State Pension increases to inflation alone is likely to be very unpopular, rightly or wrongly. Over long periods, wage rises have tended to exceed inflation, and a strong sense pervades that pensioners should not see their living standards fall relative to those of working people. As such, linking the State Pension to average earnings is often seen as the minimum required. 

Prime Minister Andy Burnham has now confirmed is intention to legislate to alter the Triple Lock from 2030. The change he proposes would ensure the State Pension rises by the higher of inflation or 2.5% each year, but with a promise that it will always match earnings from 2030 onwards, in the event earnings overtake the other two measures.   

That is likely to mean lower increases in the State Pension compared to the Triple Lock as exists now - but increases are still likely to be faster than if rising by inflation alone. Raising the Personal Allowance by such a measure is likely to prove very expensive. The Institute of Fiscal Studies has said that every £100 rise in the Personal Allowance costs the Treasury £800m over the long term² which is perhaps why rises to tax thresholds have tended to be linked to slower-rising CPI inflation instead. 

None of this is to say, however, that yours is a bad or impossible idea - it has as much merit as any of the solutions put forward elsewhere. 

For example, the path of least resistance may lead the government to simply waive any tax owed by those living only on the State Pension. That will look sensible at first when the amounts are low but will get very costly as higher amounts fall above the Personal Allowance in future years. And would other pensioners who get a private pension - and who can therefore be taxed on this money - also be let off the tax? 

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Alternatively, the government could introduce a special Personal Allowance just for pensioners which rises with the State Pension. This was the policy of the Conservative Party which lost the last election. This might solve the problem but would extend issues we see with the Triple Lock (namely, it’s exponentially rising cost) to the Personal Allowance for a growing chunk of the population. 

Or the government could bite the bullet and build a massive system to apply tax codes to those receiving only the State Pension and make them pay the tax. That might prove the most cost-effective route eventually but would be exceedingly costly and unpopular in the short term. 

With a Budget due later this month, the last before tax on State Pension income begins to accrue from next April, we shouldn’t have long to wait before a path is chosen. 

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• Read: Should you use your pension to pay off your mortgage?

Source:

¹ Office for Budget Responsibility Economic and fiscal outlook, November 2025
² IFS Unfreezing the personal allowance, 4 August 2026