Chancellor John Healey has confirmed that the government will raise the tax-free allowance for low-income pensioners to match the full new state pension, ensuring those who rely solely on their state pension do not pay income tax this parliament.
The government intends to adjust the Triple Lock from April 2030 to fund a new national care service. Rather than rising by the highest of wage growth, inflation or 2.5%, state pension payments will rise in line with the highest of inflation or 2.5%. There will also be a mechanism to ensure the state pension keeps up with earnings growth over time.
The government has signalled that people who rely solely on the basic or new state pension will not have to pay income tax this parliament, despite the state pension exceeding the income tax personal allowance for the first time in April 2027.
The protection could be worth around £93 in the first year and nearly £770 over the duration of the Personal Allowance freeze, based on the minimum 2.5% state pension guarantee, Standard Life analysis shows.
The announcement reiterates then-chancellor Rachel Reeves' remarks in her 2025 Budget, when she announced that from April 2027 pensioners wholly dependent on the new state pension would not pay income tax, and that this policy would run to the end of the parliament.
However, pension experts have warned that emerging details of the scheme suggest that it could create messy ‘cliff edges’ and administrative headaches.
The current rate of the new state pension is £241.30 per week. The expected increase of 3.9% would take it to £250.70. In annual terms this goes from £12,547 this year (just below the tax threshold of £12,570) to £13,036. Without action, those whose only income is the new state pension could be paying tax on nearly £500.
The government has now indicated that an extra tax-free allowance will be introduced for this group – though not for pensioners as a whole.
With the tax allowance frozen for the rest of this parliament, the gap between the new state pension and the tax threshold will keep growing; even with minimum 2.5% increases on the state pension.
In addition, the new tax allowance for low income pensioners appears to apply only to those whose income exactly matches the new state pension; if so, those with just £1 of taxable income above this level would presumably lose this protection (unless a complex taper was introduced), and by year three of the policy could have to pay an extra £200 in tax as a result.
Steve Webb, former pensions minister and partner at pension consultants LCP, said: “This scheme is being developed because the repeated freezing of the personal allowance has dragged more and more pensioners into the tax net. But the proposed solution looks messy and increasingly expensive. The gap between the new state pension and the tax threshold is set to grow every year, which will make the policy hard to switch off. But if it continues, the cost will grow and grow. And if the extra allowance is available only to those on a low income, there could be a growing ‘cliff edge’ problem where those with very small amounts of private income lose the whole allowance and end up worse off than those with nothing."
Kate Smith, head of pensions at Aegon, said: "Protecting those who rely solely on the state pension from paying income tax will be welcome news for some of the lowest-income pensioners.
"However, there is a risk that creating a more generous tax position for those who have not built-up additional retirement savings could be seen as unfair by people who have had the means to do the right thing and saved through workplace and private pensions.
"Long-term pensions policy should be guided by fairness across generations and between different groups of savers, rather than short term measures designed to fix one specific issue. Any reforms need to support adequacy, reward saving and command confidence across the whole retirement system."
