I’m a state pensioner – am I being punished through taxes for my private income? ...Middle East

In our weekly series, readers can email any question about their finances, to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot and has worked in financial services for 25 years. If you have a question for her, email us at [email protected]

Question: I get the state pension and only a very small amount of private pension, but will I be essentially punished tax-wise for getting the extra income once the state pension becomes taxable. Rachel Reeves said that those who receive only the state pension won’t be taxed, so would I be better off getting that alone?

Answer: It’s completely understandable with the cost of living so high that any unfairness in the tax system can seem like a personal attack. Especially if you feel like you are worse off simply for having retirement savings over and above the state pension.

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The confusion around tax and the state pension has grown in recent years because two things have been happening at the same time. The personal allowance has been frozen for years (and will continue to be until 2031), while the state pension has continued to rise each April under the triple lock.

As a result, the state pension is gradually creeping closer to the tax threshold and will soon tip over it entirely.

This means people who have never paid tax in retirement suddenly receive brown envelopes from HMRC telling them they owe money, often for very small amounts.

This problem is not the result of any change in how the state pension is taxed. The state pension has always been taxable income. What has changed is the gap between the tax-free allowance and the level of the state pension.

That gap is narrowing fast, and it is catching out many older people who assumed their pension income would always sit comfortably below the threshold.

The budget announcement you have read about is the government’s attempt to tidy up this unintended consequence. From 2027 to 2028, anyone whose only income is the state pension will have their small tax bills written off.

HMRC will not pursue the tax even if the pension exceeds the personal allowance. It is a practical fix to stop millions of simple assessments being issued for very small liabilities.

Where this leaves you is slightly different because you also receive a small private pension.

Once you have more than one income source, even if that additional income is tiny, you fall outside the new carve-out. HMRC will continue to treat you like any other taxpayer and will collect tax if your combined income breaches the personal allowance.

The tax will come out of your private pension simply because that is the only income stream HMRC can adjust. They cannot apply PAYE to the state pension.

It can feel unfair when you see deductions coming out of a private pension that is smaller than the state pension itself.

But the underlying tax position is the same as if HMRC had been able to take the money directly from the state pension. You are not being penalised for having an extra income source. It is only that the small write-off applies exclusively to people who have no other taxable income at all.

The government is creating a very narrow administrative exception for a group who would otherwise face a confusing paper chase for tiny amounts of tax. Anyone with even a modest private pension, savings interest or part-time earnings will still have their tax collected in the usual way.

So the real issue is the long freeze on tax thresholds. That is what has pushed ordinary pensioners into the tax system.

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The 2027 change softens the administrative burden for a specific group, but it does not remove the core problem. If your total income exceeds the personal allowance, tax will continue to be due, and the presence of an extra income source simply means HMRC has somewhere to collect it.

This is a good moment to review whether your private pension withdrawals can be shaped to keep your income steady across the year and to check whether you might benefit from Marriage Allowance or topping up past National Insurance years to strengthen your long-term position.

But rest assured, you are not being treated more harshly than anyone else in your circumstances. It is the frozen thresholds that are creating the squeeze, not your private pension.

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