Retiree Alan Perkins Pays £800 Income Tax Despite Relying Solely on State Pension
By Pieter Snepvangers, Money Reporter – 21 December 2025
Alan Perkins, a 71-year-old retiree, faces an unexpected and frustrating situation: despite relying exclusively on his state pension, he is paying £800 a year in income tax. This predicament highlights perceived flaws in the Chancellor’s current tax exemption plans concerning state pensions.
The Issue at Hand
When Labour’s shadow chancellor Rachel Reeves recently announced that from 2027, individuals relying solely on the state pension would be exempt from paying income tax on amounts above the personal allowance, she suggested this measure was designed to prevent taxing “tiny amounts of money” from pensioners. However, for Mr. Perkins and thousands like him, this promise does not align with their current reality.
Mr. Perkins, who retired last year after working for 50 years in various jobs including as a commercial heating engineer, receives a state pension supplemented by top-ups from the now-defunct State Earnings-Related Pension Scheme (SERPS). This scheme, operational from 1978 to 2002, allowed workers to build additional state pension income by contributing through National Insurance.
Thanks to these contributions, Mr. Perkins receives approximately £16,500 a year in state pension income—about £4,000 above the current personal allowance (which has been frozen since 2021 at £12,570). This places him in a position where he must pay income tax, resulting in an annual bill of around £800. ### SERPS and Its Impact
SERPS was designed to offer additional pension benefits, but millions opted out in favor of private or workplace pensions due to National Insurance savings. It was replaced by the State Second Pension and ultimately phased out with the introduction of the new state pension in 2016. For Mr. Perkins, the additional £90 weekly pension from SERPS means his total state pension income exceeds the tax-free threshold, causing his tax liability. Notably, his wife’s pension remains below the threshold, allowing him to transfer 10% of her personal allowance and slightly reduce his tax bill.
The Freeze on Income Tax Thresholds
The crux of the problem partially lies with the government’s decision to freeze income tax thresholds until 2031—a policy initiated in 2021 by former Prime Minister Rishi Sunak and extended in last month’s Budget. This freeze inflates taxation as pensions increase due to inflation, pushing more retirees like Mr. Perkins into taxable income brackets without corresponding increases in tax-free allowances.
Future Outlook and Government Plans
The new state pension is set to rise by 4.8% in April 2026 to £241.30 per week (£12,547 annually), marginally below the personal allowance. Due to the "triple lock" system guaranteeing a minimum 2.5% annual rise, the pension is expected to surpass the personal allowance in 2027, triggering income tax obligations.
The Treasury has confirmed that the planned tax exemption will only apply to those who receive the new state pension alone, without increments such as those from SERPS. Consequently, Mr. Perkins is expected to continue paying tax on the entirety of his pension income—including Serps enhancements—while others on similar total incomes but without increments will be exempt.
Expert Reactions and Calls for Reform
Sir Steve Webb, former pensions minister, criticized the policy’s fairness: “It is indefensible that two pensioners with identical state pensions could face different tax treatments simply because one has SERPS increments.” He emphasized the inequity and complexity introduced by the current rules.
Baroness Altmann, former Conservative pensions minister, echoed concerns about the disruptive “cliff-edge” effects the policy might have on pensioners like Mr. Perkins.
The Low Income Tax Reform Group has called on Rachel Reeves to provide further clarification on the policy to address these disparities and avoid complicating the tax system further.
Personal Impact: Mr. Perkins’ Story
In his own words, Mr. Perkins recounted decades of hard work with long hours and multiple jobs to support his family, only to be surprised by the income tax deduction on his pension. “I never thought anyone on a state pension would pay tax. I can’t get my head around it,” he said.
With annual pension increases, Mr. Perkins’ tax bill is projected to rise to around £1,300 by 2031, exacerbating his financial concerns.
This case shines a light on a complex pension taxation issue affecting many retirees who have contributed to legacy state pension schemes. As the government prepares to implement tax exemptions from 2027, careful consideration is needed to ensure equity and clarity for all pensioners.
The Treasury has been approached for further comment but has yet to provide additional details.
Related Articles:
- Serps Pensions: What Are They and Can I Benefit?
- Four Reasons Why Paying Into Your Partner’s Pension Will Make You Better Off
- How Income Tax Threshold Freezes Affect Retirement Income
Join the conversation
The Telegraph welcomes respectful, on-topic comments. Please review our commenting policy before posting.