John Healey is expected to use Wednesday’s budget to set out a new pension tax allowance for low-income pensioners, so people whose only income is the state pension would not hand any of it to HMRC. The allowance is expected to match the full new state pension in the 2027-28 tax year.
That would put the allowance at £13,036 a year from April 2027, matching the expected value of the full new state pension. The regular personal allowance has stayed at £12,570 since 2021, while the new state pension was just under that level at £12,547 this year.
John Healey in Wednesday
The full details are due from John Healey in Wednesday’s budget. The new state pension is paid to anyone who has retired since 6 April 2016, and the triple lock means it rises each April by whichever is highest: inflation, wage growth or 2.5%.
This year, wage growth was 3.9% for the relevant month, which helped push the full new state pension close to the tax threshold. By April 2027, the pension is expected to reach £13,036 a year, creating the basis for the new allowance.
Steve Webb and HMRC
Steve Webb said the policy could be “messy and increasingly expensive”. He said the gap between the new state pension and the tax threshold is set to grow every year. “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,” he said.
The practical effect is that retirees in the UK who rely only on the state pension would be shielded from income tax on that income. Rachel Reeves had already promised that anyone deriving all of their income from the state pension would not be taxed, and that promise was confirmed this year.
Budget 2026 and the cliff-edge
Webb also warned of a growing “cliff-edge” if the allowance is limited to low-income pensioners. “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,” he said.
That leaves the key operating point for pensioners with small private incomes: whether any extra earnings will remove the full allowance or whether the system will taper it in some way. The reported plan points to a simple rule for people on state pension only, but it also creates a sharp line between those with no other income and those with even a little.
