The Government set out new policies for the state pension in the Budget
Pensioners are facing a major shift to the state pension over the coming years – and an expert says you could on day get an ‘unsettling’ letter. During the Autumn Budget, the Government pledged to ensure those relying solely on the state pension won’t be stung with small income tax bills through self assessment from 2027/2028.
A Budget document said: “The Government is exploring the best way to achieve this and will set out more detail next year.” This clarification was important as the full new state pension is set to jump from the current £230.25 a week to £241.30 a week from next April, or £12,547.60 annually, when payments surge by 4.8 percent thanks to the triple lock.
This pushes payments perilously close to exhausting the entire £12,570 personal allowance and triggering an income tax bill. The triple lock guarantees payments increase in line with whichever is highest of inflation, the rise in average earnings or 2.5 percent.
Even with the minimum 2.5 percent rise, the full new state pension would trigger a tax bill from April 2027. Chancellor Rachel Reeves has now given her word that those whose only income is the state pension will not pay tax for the duration of this Parliament.
Pensions expert Steven Cameron from wealth firm Aegon has weighed in on how the Government might deliver on this promise. 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.
“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 simple assessment paperwork could prove a lifeline for the UK’s most at-risk 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 relying solely on the state pension brings its own complications. Mr Cameron pointed out there are several concerns around fairness to weigh up.
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 question being raised is why state pensioners should escape taxation when they exceed the personal allowance threshold, whilst working age people face the taxman, even on relatively modest incomes.
Chancellor Rachel Reeves recently told Martin Lewis, founder of Money Saving Expert, that for those with no income other than the state pension, “in this Parliament, they won’t have to pay the tax”.
