John Healey is expected to use Wednesday’s budget to set a state pension tax allowance for low-income pensioners at the same level as the full new state pension. The plan would mean retirees in the UK whose only income is the state pension would not hand any of it to HMRC.
The special allowance would be set at £13,036 in the 2027-28 tax year, matching the full new state pension expected from April 2027. The regular personal allowance has been frozen at £12,570 since 2021, so the new rule would keep pace with the pension rather than the wider tax threshold.
Wednesday’s budget
A report in The Times says the allowance would rise in line with pension increases after that, which would keep the two figures aligned as long as the policy remains in place. Rachel Reeves has already promised that anyone deriving all of their income from the state pension would not be taxed, and that promise was confirmed this year.
The state pension rises each April under the triple lock, which promises the highest of inflation, wage growth or 2.5%. Wage growth for the relevant month was 3.9%, and the triple lock is in place until 2030.
Steve Webb
Steve Webb said the proposal 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, which will make the policy hard to switch off. But if it continues, the cost will grow and grow.”
Webb also warned of a cliff-edge for people with small private incomes. “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.”
HMRC and retirees
The practical issue is how the rule will be applied in a system that already has 9.6 million taxpayers. Retirees in the UK who rely only on the state pension would be shielded from income tax on that income, but the design matters for anyone with a small private pension or savings income because the allowance appears to depend on income level.
That leaves a clear test for Wednesday’s budget: whether the allowance will be simple enough to protect people with only pension income, or whether it will create a line that is hard to cross without losing the full benefit. The answer will determine how far the rule reaches beyond the full new state pension and who, if anyone, is left outside it.
