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The government is expected to announce a higher income-tax threshold for people whose only income is the state pension, matching the full new state pension rate of £13,036 from next April. The proposal has not been fully confirmed, and pension experts warn that older retirees and people with even small private pensions could be excluded.
The government is expected to announce in Wednesday’s Budget a higher income-tax threshold for pensioners who rely solely on the state pension, matching the full new state pension rate of £13,036 a year from next April. The proposal could stop some low-income retirees from paying tax on their state pension, but its scope and eligibility rules have not been confirmed.
According to reports, the plan would lift the threshold for people whose only income is the state pension to £13,036, the expected annual rate of the full new state pension from next April. The state pension is due to rise by nearly £500 a year under the triple lock, which increases it by the highest of inflation, earnings growth or 2.5 per cent. The usual personal allowance, above which most people start paying income tax, remains £12,570.
The proposed tax relief is intended to address the fact that the full new state pension is set to exceed the frozen personal allowance. People who receive only that pension would otherwise begin paying income tax on some of it. A report in The Times put the scheme’s cost at £200 million a year by 2030. That is a reported estimate, not a published government cost assessment.
Standard Life estimates that a person relying only on the state pension could save £93 in the first year and £770 by 2031 if the policy remains in place. The estimate assumes the state pension rises by 2.5 per cent each year; higher increases could produce different savings. The £770 figure is therefore a projection, not a guaranteed payment or a saving that would apply to every pensioner.
Who Could Gain or Miss Out
The proposal could prevent people with no other income from paying tax on a pension that is their main source of support. But the reported eligibility test — relying solely on the state pension — could exclude people with even a small amount of private pension income. That raises the possibility of a sharp eligibility boundary: someone with a modest additional pension might face a tax bill while a person with no private income receives the higher threshold.
Age and pension history may also affect who benefits. Many people who retired before the new state pension began in 2016 receive the older basic pension, which is lower than £13,036. Some also receive additional state pension through arrangements such as SERPS or the State Second Pension. If the exemption is limited by age, pension type or income source, retirees with similar overall incomes could receive different tax treatment.
The issue matters beyond the immediate tax saving because the rules may influence how fair the system appears to people who saved through workplace or private pensions. Pension specialists say the design will need to balance support for low-income retirees with clear rules that do not unexpectedly penalise people for having a small amount of additional income.
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Frozen Allowance Meets Rising Pension
The personal allowance has been frozen at £12,570, while the state pension is scheduled to rise under the triple lock. That gap means the full new state pension is expected to move above the tax threshold next April. The reported Budget measure would set a separate threshold for a particular group rather than raise the standard allowance for everyone.
People who retired before spring 2016 generally receive the old basic state pension. It is expected to rise by £7.20 a week to £192.10 a week, or about £10,000 annually. Some older retirees also receive additional pension linked to their past contributions, which can lift their total income above the standard allowance. It is not yet known whether the proposed exemption would cover those additional payments.
Former chancellor Rachel Reeves announced the intention to protect people living solely on the state pension from tax last year, and her successor, John Healey, has confirmed plans to proceed. The detailed design is still pending. Reports say the new threshold could track the state pension for the rest of this parliament, potentially keeping eligible pensioners below the tax threshold until at least 2029.
“The Budget may introduce an age penalty for pensioners in future.”
— Ros Altmann, former pensions minister
Eligibility Rules Still Unpublished
The government has not yet published the measure’s full terms. It remains unclear whether eligibility will be limited to people under 75, whether retirees on the old state pension will qualify, and how income from SERPS, the State Second Pension or a deferred state pension will be treated.
It is also not clear how the reported threshold would work for people who receive even a small private or workplace pension, or whether there would be an income limit beyond the requirement to rely solely on the state pension. The £93 and £770 savings figures depend on Standard Life’s stated assumptions about future annual pension increases and the policy continuing. The reported £200 million annual cost is an estimate attributed to The Times, not a confirmed Treasury figure.
Budget Details Will Set the Scope
The government is expected to set out its Budget plans on Wednesday. The announcement and any accompanying Treasury documents should clarify the threshold, who qualifies, when it starts and how it will be administered. Those details will show whether the measure covers older pensioners and people with additional state pension entitlements, or is restricted to people with no other income.
After the announcement, the practical effect will depend on the final rules and future state pension uprating. Pensioners who may be close to the eligibility boundary will need to check the published criteria before assuming that they qualify or that they will save a particular amount.
Key Questions
What tax change is expected in the Budget?
Reports say the government plans to raise the income-tax threshold to £13,036 for people whose only income is the state pension, matching the expected full new state pension rate from next April. The full policy has not yet been published.
How much could eligible pensioners save?
Standard Life estimates savings of £93 in the first year and £770 by 2031 if the policy remains in place. Its estimate assumes the state pension rises by 2.5 per cent annually, so actual savings could differ.
Could people with private pensions be excluded?
Reports suggest that people with income from a private pension, even a small amount, may not qualify. The government has not confirmed the eligibility test or how additional income will be treated.
Will older pensioners on the basic state pension qualify?
That is not yet clear. The proposal could treat people on the pre-2016 pension system differently, particularly if they receive additional state pension income, but final rules have not been announced.
When will the change take effect?
The reported threshold is intended to apply from next April, when the full new state pension is expected to reach £13,036 a year. The government still needs to confirm the start date and implementation details.
Source: thisismoney.co.uk
