The Government set out new policies for the state pension in the Budget
The Government is making changes to tax on the state pension(Image: Getty)
A major change to the state pension is set to take effect over the coming years. During the Autumn Budget, the Government pledged to ensure that people relying solely on state pension income would be spared from paying modest sums of income tax through self assessment from 2027/2028.
A paper published as part of the Budget stated: “The Government is exploring the best way to achieve this and will set out more detail next year.” This was a timely update given that the full new state pension will climb from its present £230.25 weekly rate to £241.30 per week from April next year, equating to £12,547.60 annually, following a 4.8 percent increase under the triple lock mechanism.
This figure sits marginally beneath the £12,570 personal allowance threshold when income tax obligations kick in. The triple lock guarantees that payments increase in accordance with whichever proves highest among inflation rates, average earnings growth, or 2.5 percent.
Some state pensioners will be spared from paying income tax(Image: Getty)
Even with the baseline 2.5 percent uplift, the full new state pension would incur tax liability from April 2027. Chancellor Rachel Reeves has now said that claimants whose sole income derives from the state pension will remain exempt from taxation throughout this Parliament.
Steven Cameron, pensions director at wealth management company Aegon, said more detail is needed about how this policy will work. He said: “While legislation may not be needed, the Government needs to explore how to deliver on this.
“If tax were to be collected, state pensioners would currently face carrying out a simple tax assessment – effectively receiving a letter from the taxman through the door, which would have been unsettling for many, even if the actual amounts due were minimal. It’s hard to see what the alternative would have been other than finding a way to deduct any tax due directly from the state pension for the first time.
State pension payments increase each April(Image: Getty)
“This might have involved complex new data exchanges between the DWP and HMRC, which would need careful consideration and could have been costly to implement.” He suggested that avoiding the need to complete a simple assessment could prove invaluable for more vulnerable pensioners.
The expert said: “This could have been a cause for concern for many state pensioners. Some might have had no savings ‘buffer’ to pay even a small tax bill, and this could have caused a lot of anxiety.”
However, exempting those whose only income stems from the state pension brings its own complications. Mr Cameron said there are issues around fairness to think through here.
He said: “State pensioners with no income other than the state pension might very well feel it is unfair that they might have had to pay income tax on part of this – a case of the Government giving with one hand and taking with the other. There are many pensioners who have both a state and a private or workplace pension, taking them above the personal allowance.
“They pay income tax on all income above the personal allowance, so may question the fairness of those pensioners who haven’t saved in a private or workplace pension being exempt from income tax. You could have two pensioners on exactly the same total pre-tax income but the one who has a combination of private and state pension would be subject to income tax, whereas the one with state pension only wouldn’t.”
Another point of contention is why pensioners receiving state pensions should not be taxed when their income exceeds the personal allowance threshold, while working-age individuals are, even if they earn a relatively modest income.