Prime Minister Andy Burnham has been warned that "time is running out" for the government to decide how it will deal with a looming State Pension tax issue that could affect thousands of pensioners. The warning comes as the State Pension is likely to increase by around 4% from April 2027 under the government’s Triple Lock policy. If the increase reaches the expected level, the full new State Pension could rise from its current £241.30 a week to approximately £251 a week from next April, according to Fidelity International.

That would take the annual payment to around £13,052, representing an increase of more than £500 compared with the current yearly amount of £12,547.60. However, the increase could create an unexpected tax problem for people who rely entirely on the State Pension, an expert has warned.

Under the Triple Lock, the State Pension goes up each year by either 2.5%, inflation, or earnings growth - whichever is the highest figure. For the 2026/27 tax year, the full new State Pension increased by 4.8% to £241.30 per week, or roughly £12,548 a year.

A further rise of around 4% would push the full new State Pension above the current income tax Personal Allowance of £12,570. Your State Pension is taxable income, but tax is not taken off before you get it. You’ll only pay tax if your total taxable income, including your State Pension, is higher than your personal allowances. Generally pensioners whose only income is the state pension do not have to pay any income tax in practice. This is because their annual income falls below the income tax personal tax allowance – the amount of income taxpayers may receive tax-free.

But an expert has warned this could change next year if government action is not taken. Ed Monk, associate director and personal finance expert at Fidelity International, said policymakers face an increasingly difficult decision. Fidelity International is a financial services company that provides investment management services including mutual funds, pension management and fund platforms to private and institutional investors.

He said: "If the government decides to not collect this tax it risks creating a two-tier system: many pensioners can be taxed on their State Pension perfectly well because they have private pension income and a tax code. Would it be fair to deny them a waiver for paying tax on their State Pension? Bear in mind that they need only a very small private pension to be taxed this way, so they may not be much better off than others who get only the government payment.

"Then is the potential intergenerational conflict, of pensioners being handed another break in a system which already advantages them compare with working age people. The only alternative, if the government doesn’t want to start sending out tax demands en masse, is an expensive and cumbersome extension of PAYE to State Pensions."

He warned: "Time is running out for the government to pick a solution."