Nelly
In July 2025, millions of UK pensioners born after 1951 are experiencing significant changes in how their state pension is calculated and taxed.
This double hit—reduced pension entitlements and higher income tax liabilities—is leaving many with less take-home income than anticipated.
If you were born between 1952 and 1960, you may be among those most affected. Let’s break down the two major policy changes, who’s affected, and what you can do to protect your finances.
Contracted-Out National Insurance Years Being Reassessed
Between 1978 and 2016, millions of UK workers were part of contracted-out pension schemes, which meant paying lower National Insurance (NI) in exchange for participating in a workplace pension instead of the Additional State Pension (SERPS).
What Changed?
The Department for Work and Pensions (DWP) has introduced stricter adjustments when calculating how those contracted-out years impact final state pension payouts. The changes could reduce state pensions by £10–£20 per week, especially for those with long service in such schemes.
Example: A retiree expecting the full new state pension of £236.90 per week may only receive around £216, depending on their NI record
Tax Allowance Freeze Is Eating Into Rising Pensions
The personal income tax allowance—the amount you can earn tax-free—has been frozen at £12,570 since 2021. Meanwhile, the state pension continues to rise due to the triple lock guarantee (inflation, earnings, or 2.5%, whichever is highest).
As a result, more of your pension is now taxable.
Example Scenario:
- New State Pension: £236.90/week = £12,319/year
- Full Basic Pension: £181.40/week = £9,443/year
- Total Income: £21,762/year
- Taxable Income: £9,192
- Estimated Tax: Over £1,800 per year
Who Is Most Affected?
| Birth Cohort | Contracted-Out Pension Cuts | Tax Burden from Allowance Freeze |
|---|---|---|
| 1952–1955 | High | Moderate |
| 1956–1960 | Moderate | High |
Early 1950s pensioners are losing more from NI deductions, while younger pensioners face steeper tax bills due to rising pension income and frozen thresholds.
How to Protect Your Pension Income
Despite the policy shifts, several actions can help limit the financial impact:
Check Your State Pension Forecast
Use the Gov.uk portal to review your forecast and identify NI gaps or deductions.
Top-Up Your NI Contributions
If there are missing or reduced years, you may be eligible to buy Class 3 voluntary contributions to boost your pension.
Consult a Tax Advisor
A tax advisor can help with income-splitting, pension deferral, or drawing down other retirement income to lower tax liability.
Apply for Pension Credit
If your income is modest, Pension Credit may help offset losses and even open eligibility for other benefits like housing or council tax support.
Is Government Relief Coming?
Several pensioner advocacy groups are pushing the government to:
- Raise the personal tax allowance for pensioners
- Re-examine contracted-out deduction calculations
Summary of Key Details
| Factor | Detail |
|---|---|
| Contracted-Out Recalculation | Reduces pension by £10–£20/week for many |
| Personal Tax Allowance Freeze | Still at £12,570 despite rising pension payments |
| Most Affected Cohort | Born 1952–1960 |
| Potential Annual Tax Owed | £1,800+ on combined state pension |
| Mitigation Options | NI top-ups, tax planning, Pension Credit |
However, no official relief has been announced yet. Future changes may come via the Autumn Statement or Spring Budget, so staying informed is crucial.
UK pensioners born after 1951 are facing a double challenge: lower-than-expected pensions due to contracted-out deductions, and higher tax bills because of frozen income thresholds.
While these changes may feel unfair, understanding the rules and proactively managing your finances can soften the impact.
FAQs
Why is my state pension lower than expected in 2025?
If you were in a contracted-out pension scheme between 1978 and 2016, the DWP may now be applying tighter calculations that reduce your final pension amount.
Can I reverse the reduction from contracted-out years?
No, but you can increase your state pension by buying voluntary NI contributions if you have gaps in your record.
Why is more of my pension being taxed now?
Because the personal allowance is frozen, but your pension increases, more of your income exceeds the tax-free threshold.
Is Pension Credit still available for those affected?
Yes. Pension Credit is a means-tested benefit that can supplement your income and may offer other discounts.
Bar Steward Banker
Tell Reeves hands off cash ISA’s
It’s all to tie us up in knots so we are so confused we are a bumbling mess in the corners.
Sort the pensions out and pay everyone the equivalent of the new state pension and stop discriminating against older pensioners who paid for almost 50 years 15 years more than the new state pensioners.