Reports suggest the government is considering increasing the Personal Allowance from £12,570–£15,570 in the upcoming Budget. If introduced, the move would mark the first increase in the tax-free threshold since it was frozen, potentially providing relief for some households amid ongoing fiscal pressures. The Personal Allowance is currently set to remain at £12,570 until April 2031 under existing policy.
The freeze, combined with regular increases in the State Pension under the triple lock, is already bringing more retirees closer to the Income Tax threshold. The triple lock means the State Pension rises each year by the highest of average earnings growth, inflation, or 2.5%.
The full new State Pension increased by 4.8% for 2026 and 2027, from £230.25–£241.30 a week. This is equivalent to £12,547.60 a year, bringing it close to the current £12,570 Personal Allowance for people with little or no additional income.
Further pension increases could narrow the gap with the frozen Personal Allowance for some pensioners in future.
Experts highlight the challenges created by fiscal drag, which occurs when incomes rise while tax thresholds remain unchanged, bringing more people into the tax system or higher tax bands without any change to the rates themselves. Office for Budget Responsibility analysis has previously indicated that the extended freeze in tax thresholds will bring significant numbers of additional people into the income tax system by the end of the decade. Pensioners are expected to form a growing share of those affected as State Pension payments rise while the Personal Allowance remains unchanged.
Derence Lee, Chief Finance Officer at mutual society Shepherds Friendly, has commented on the implications for pensioners and those approaching retirement. “With the personal allowance frozen at £12,570 until 2031, each rise in the State Pension increases the likelihood that more pensioners will be drawn into paying income tax for the first time. Even relatively small amounts of additional income, such as a private pension or part time earnings, could then push them over the threshold.”
“In effect, some pensioners may find that part of the future State Pension increases are offset through taxation. While the triple lock remains important in protecting against rising prices, the freeze in tax thresholds means fiscal drag is likely to affect a growing number of retirees in the coming years.”
“For those approaching retirement, it’s increasingly important to look at how different income sources, including workplace pensions, ISAs and savings, work together to provide a sustainable and tax efficient income.”
An increase to £15,570 would restore some of the ground lost to inflation since the freeze began and could take some lower-income households out of tax altogether. It would also create greater headroom for those whose combined State Pension and other modest income currently sits just above the existing threshold. However, any such change remains speculative at this stage, with final decisions due to be set out by the Chancellor at the Budget.
For people nearing retirement, the current environment highlights the importance of careful income planning. Workplace pensions, individual savings accounts, and other savings vehicles can be structured to manage the point at which income becomes taxable. Mutual societies and other providers continue to stress the importance of reviewing how these sources interact as State Pension increases and frozen tax thresholds affect retirement income.
The debate over the Personal Allowance forms part of wider discussions about the cost of living and the balance between protecting public finances and supporting household incomes. Fiscal drag has become a prominent feature of the tax system as successive freezes have generated additional revenue without raising headline tax rates.
Whether the government proceeds with a rise to £15,570 or maintains the freeze, the relationship between the State Pension and Income Tax thresholds will remain an important issue for current and future retirees.