Chancellor Rachel Reeves has committed that pensioners whose only income is the state pension will not be forced to pay income tax during this Parliament, with the government working on plans to ensure this. According to Reeves, the state pension increase from April will be around £575 a year, and by the end of the current Parliament it is forecast to be £2,000 a year higher. 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. The previous government froze income tax thresholds, which is why the state pension will come into income tax if nothing is done.
The current personal allowance threshold is £12,570. The personal allowance is frozen until 2031. This freeze, combined with the projected pension increases, creates the potential tax liability for pensioners.
However, the protection will not extend to all state pension recipients. According to HM Treasury, older state pensioners with additional pension payments from the DWP will not be allowed to get a tax exemption, 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.
Beyond income tax concerns, broader pension changes are also underway. From April 6, 2027, Chancellor Rachel Reeves will bring direct contribution pension pots into people’s estates for inheritance tax purposes.
Despite these changes, pensions retain substantial benefits for savers. 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 employee 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 about £131,000 over 30 years, half as much as a pension.