Gatland's side suffered their first defeat in four matches against England, but their second on the road in this Championship and as a result, Wales' hopes of a third straight title are over.
Tries from Danny Care and Luther Burrell - as well as 19 points from Owen Farrell - did the damage, while Wales had just six Halfpenny penalties to show for their efforts.
Neither kicker missed an attempt at goal and Halfpenny was arguably Wales' best performer, but a successful last-ditch tackle to deny Burrell late on resulted in injury.
"Leigh has dislocated his shoulder and will be out for the rest of the Championship, that's his season over," said Gatland.
Halfpenny's injury means Gatland will make at least one change next week against Scotland in Cardiff and he hinted at a few more - but the New Zealander believes it's crucial that Wales end their campaign on a high.
He added: "A good performance against Scotland is paramount for us. At times we've played well and at times we haven't and that's disappointing so next week is vital to finish the campaign on a positive.
"It think it's been tough 18 months for these players in retrospect, a Grand Slam and a Lions tour and it's been tough on them.
"I think [England] are a good side but I think the two teams cancelled each other out for long periods.
"We got in at 20-15 at half-time having not played too well and we thought that if we were more accurate, didn't turn the ball over as much, then it could have been a pretty different ball game.
"I don't think there's a massive amount between these sides. Teams are pretty close in this competition and the top four teams can beat each other on the day if they get their performance right and England got their right today."