Healey is expected to shield low-income pensioners from income tax – but how will it work?
The government is expected to give low-income pensioners a higher personal tax allowance so people whose only income is the state pension do not pay income tax on it. The change is intended to protect them as the full new state pension is set to rise above the standard tax-free allowance.
From April 2027, the full new state pension is forecast to be £13,036 a year, while the standard personal allowance remains £12,570. A reported proposal would align a special allowance for eligible pensioners with the full new state pension and increase it as the pension rises. Former pensions minister Steve Webb warns this could become costly and create a “cliff edge” for people with even a small amount of other income; how people on the older state pension would be covered is also unclear.
In short
- A special tax allowance may protect pensioners reliant only on the state pension.
- The full new state pension is due to reach £13,036 in 2027.
- Experts warn the proposed rules could create costly cliff edges.
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The case for
A higher allowance would prevent pensioners who rely solely on the state pension from owing tax simply because the pension has risen above the standard threshold. Linking it to the full new state pension could make the protection automatic as payments increase, offering low-income retirees greater certainty and safeguarding their basic income.
The case against
A separate, higher allowance could be expensive for the public finances, with the cost potentially growing as the state pension rises. If eligibility or the threshold is narrowly drawn, pensioners with even modest additional income could face a sharp tax change, while unclear arrangements for people on the older state pension could leave others without equivalent protection.
Explained simply
The state pension is a regular payment from the government for people who have reached state pension age. Income tax is usually due when a person’s taxable income goes above their personal allowance, the amount they can receive tax-free.
The full new state pension is forecast to exceed the standard personal allowance from April 2027. That could mean some pensioners owe tax even if the state pension is their only income. The reported proposal would give eligible pensioners a higher allowance linked to the state pension.
The change would affect how pension income is taxed and could have implications for public spending. Former pensions minister Steve Webb has raised questions about its cost and how it might treat people with a small amount of other income.