Chancellor Rachel Reeves confirmed the Government is working on plans to ensure pensioners whose only income is the state pension will not be forced to pay income tax during this Parliament. The state pension increase from April will be around £575 a year, and it is forecast to be around £2,000 higher by the end of the current Parliament. The previous Government froze income tax thresholds, which is why the new state pension will come into income tax if nothing is done. The current personal allowance threshold is £12,570, and the personal allowance is frozen until 2031. If the triple lock continues at a similar rate, the full new state pension is expected to exceed the tax-free allowance from April 2027, making pensioners technically liable for income tax. However, the specific policy the Government is developing remains unclear, and it is unknown how many pensioners will be affected by the state pension exceeding the tax-free allowance from April 2027.
Older state pensioners with additional pension payments from the DWP will not be allowed to get an exemption on their tax bills, even if they have no other non-DWP income. The additional state pension is an extra amount on top of the basic state pension for those born before specific dates (men before April 6, 1951, women before April 6, 1953) unless contracted out. How the Government will distinguish between pensioners with only state pension income and those with additional DWP payments for tax purposes has not been detailed.
But people will have to pay the tax, they just won’t have to do a return or will they not have to pay the tax?
From April 6, 2027, Chancellor Rachel Reeves will bring direct contribution pension pots into people’s estates for inheritance tax purposes. The detailed rules for inheritance tax on pension pots from April 2027, and how they will be implemented, are not yet specified.
Basic rate taxpayers get 20% tax relief on pension contributions, higher rate 40% taxpayers can claim another 20% back, and additional rate 45% taxpayers can claim even more. An employer on the median UK salary of £39,039 could build a pension pot of nearly £262,000 over 30 years with minimum 8% contributions and 6% average return. Saving the equivalent into an ISA could leave someone with just under £131,000 over 30 years, half as much as a pension. According to Daily Express - Finance, Martin Lewis described uncertainties around the tax exemption, questioning whether people will have to pay the tax or just avoid filing returns. According to Daily Express - Finance, Rachel Reeves described the exemption as applying only in this Parliament, stating that no commitments can be made beyond that and that a simple workaround is being explored. Whether the tax exemption for pensioners with only state pension income will continue beyond the current Parliament remains unknown.
In this Parliament they won’t have to pay the tax. Further on, I’m not able to make any commitments on that. We are looking at a simple workaround at the moment.