The government has said that pensioners whose sole income is the state pension will not have to pay small amounts of tax for breaching the personal allowance.
The government has committed to maintaining the triple lock, meaning the state pension is set to increase by 4.8% in April, boosting payments by £574.50 (new state pension) and £439.40 (basic state pension).
The increase takes the annual benefit right up to the brink of the frozen personal allowance tax threshold, which was frozen in yesterday's budget at £12,570 until 2031.
As a result, the full new state pension will exceed the personal allowance by 2027/8, generating a tax liability.
However, the government's full Budget documents, released yesterday, state: "The government will ease the administrative burden for pensioners whose sole income is the basic or new state pension without any increments so that they do not have to pay small amounts of tax via Simple Assessment from 2027-8 if the new or basic state pension exceeds the personal allowance from that point.
"The government is exploring the best way to achieve this and will set out more detail next year."
Jon Greer, head of retirement policy at Quilter, commented: "Frozen tax thresholds and the triple lock have created an absurd situation where the state pension now takes up so much of the personal allowance that thousands of pensioners whose sole income is the state pension are being dragged into the tax system. The government’s decision to write off these “small tax” bills from 2027 is a sticking-plaster solution to a problem of its own making.
"This is the inevitable consequence of tax policy that hasn’t kept pace with reality. HMRC simple assessment letters have soared as more retirees unexpectedly face tax bills. In the past, age-related personal allowances helped protect older taxpayers: in 2012–13, those aged 65–74 had an allowance of £10,500, and those 75 and over had £10,660, compared to £8,105 for under-65s. Simplifying to one allowance made sense, but freezing it has created a new mismatch.
"Scrapping these bills will ease confusion, but it doesn’t fix the underlying problem. With the state pension rising 4.8% next April under the triple lock and thresholds frozen, this mismatch will keep growing. This also won't help pensioners that have only very meagre additional pensions.
"This issue puts the triple lock back in the spotlight albeit the government has committed to maintain it until 2029. The formula, whichever is highest of earnings growth, inflation, or 2.5%, was introduced to protect pensioners during low growth and reverse decades of decline in pension value. But today, it acts as a rigid mechanism that drives up spending regardless of affordability or fairness.
"A better alternative would be a smoothed earnings link, basing annual increases on a rolling three-year average of wage growth. This would reduce volatility and align pension increases with long-term trends. During periods of high inflation, pensions could rise with prices until real earnings recover, then revert to the earnings benchmark. This approach offers fairness, predictability, and fiscal discipline, supporting pensioners while recognising pressures on working-age taxpayers."
However, others have stated that confusion remains over income tax liabilities, stating that although the Chancellor’s Budget speech confirms pensioners won’t face simple assessment tax returns, there has been no detail on how tax will be collected.
Steven Cameron, pensions director at Aegon, said: “State pensioners will be relieved to hear this week that the state pension triple lock is being honoured in full, leading to a 4.8% increase which is above inflation.
“However, the sting in the tail is that by 2027/28, the full new state pension will exceed the personal allowance which has today been frozen until 2031, leading to even those relying solely on the full new state pension for retirement income facing a tax liability.
“This liability will grow in future years and if the triple lock led to the same increases from now till 2031, it could grow to over £500.
“The Chancellor has offered some assurances by saying pensioners won’t have the admin burden of completing simple assessment tax returns.
“However, importantly, this is not the same as waiving the tax. The government is to look into alternative approaches to dealing with the tax charges. It’s important that this made as easy and stress-free as possible for pensioners.
“While state pensioners may not face tax bills through the letterbox, many of those solely reliant on the state pension will in future pay tax on some of this – a case of the government giving with one hand and taking with the other.”
