The Chancellor has announced some ‘welcome news’ amid concerns that people on the state pension will have to start paying tax
The personal allowance is currently £12,570
Chancellor Rachel Reeves has announced a major change to tax on pensions amid concerns that many on the state pension will be pushed into paying income tax for the first time in April when rates increase. The Government has confirmed that anyone whose sole income is the state pension will not pay income tax when state pension payments increase above the personal allowance.
Personal allowance – the income you don’t pay any tax on – is frozen at £12,570 until 2028, but as state pension rates go up, more retirees are scared they will see themselves pulled into the tax net each year. The full new state pension is already very close to using up all the £12,570 tax-free allowance, and becoming subject to income tax.
State pension payments will increase 4.8 percent next April, increasing the full new state pension to £241.30 a week, or £12,547.60 a year, just over £20 away from using up all the personal allowance. As state pension payments increase at least 2.5 percent each year in line with the triple lock, the full new state pension will certainly be taxable from April 2027, the Express reports.
The triple lock guarantees the state pension increases each April in line with whichever is highest: the rise in average earnings, the rate of inflation or 2.5 percent. But the Chancellor has now said anyone who lives only on the full new state pension will not have to pay the tax.
Rob Mollan, managing director and owner of York tax accountants Mollan & Co, has called the announcement welcome news. He said: “Keeping the full new state pension out of income tax will be welcome news for many older people, especially at a time when household budgets are already under pressure.
“But it does highlight a growing gap between those above state pension age and working-age taxpayers who start paying income tax as soon as they cross the frozen personal allowance. From a fairness point of view, it’s understandable that some will question why pensioners effectively benefit from a higher allowance, while younger workers on relatively modest incomes are drawn into tax earlier each year.”
The personal allowance will remain at £12,570 for the time being. The Government had previously said it would allow the policy to un-freeze and increase again in line with inflation from April 2028. But now ministers have said they will keep it at its current level going forward. Ms Reeves said after announcing her Autumn Statement that she would be “asking ordinary people to pay a little bit more” through the frozen allowances, which mean that many people will pay more income tax as their income goes up.
Mr Mollan said: “The freeze on thresholds has quietly increased the tax burden on employees and small business owners across Yorkshire. That said, pensions are often the main source of income for older residents, and keeping them tax-free reduces financial worry for people who may have limited flexibility to boost their earnings.
“The challenge for the government is to strike a balance that feels fair across generations, without placing even more strain on those who keep the local economy moving.” He called on the Government to provide more clarity on its tax policies going forward.
The accountant said: “What we’d like to see next is clarity. York’s businesses and residents plan better when they know what’s coming, and any long-term tax strategy needs to reflect the realities facing both working families and pensioners.”