The government is reportedly planning to introduce a higher personal allowance for pensioners whose only income is the state pension in Wednesday’s Budget.
The proposal – first reported in The Times on Monday (26 October) – follows a commitment made by former chancellor Rachel Reeves to protect pensioners whose only income is the state pension from paying income tax. From April 2027, the new state pension is expected to exceed the frozen £12,570 personal allowance for the first time.
A 3.9% increase through the triple lock would take the new state pension to £250.70 a week, or £13,036 annually, leaving £466 above the tax threshold.
However, plans to shield only those relying on the state pension have been criticised by some industry commentators.
Tom Selby, director of public policy at AJ Bell, questioned whether either approach would deliver a fair outcome.
“If the proposal means people who only have state pension income benefit while those who have saved privately don’t, those who have saved could understandably argue their diligent behaviour has effectively been punished,” Selby pointed out.
“Equally, if a higher personal allowance is handed to all those above state pension age regardless of the income source, a two-tier income tax system explicitly favouring older people will have been created. Given those already above state pension age do not pay National Insurance currently, creating a further income tax benefit for older people risks hardening perceptions of intergenerational unfairness.”
Kate Smith, head of pensions at Aegon, said protecting those dependent on the state pension would be welcome, but warned against undermining incentives to save.
“Long-term pensions policy should be guided by fairness across generations and between different groups of savers, rather than short-term measures designed to fix one specific issue,” Smith said. “Any reforms need to support adequacy, reward saving, and command confidence across the whole retirement system.”
Rising costs and administrative challenges
The reported plan would introduce a personal allowance matching the state pension for low-income pensioners, with the allowance then rising alongside state pension payments for a period.
Steve Webb, partner at LCP and a former pensions minister, warned that the arrangement could become increasingly costly, even beyond this Parliament, if state pensions continue to rise faster than the standard personal allowance.
He explained: “The gap between the new state pension and the tax threshold is set to grow every year, which will make the policy hard to switch off. But if it continues, the cost will grow and grow.”
Webb’s calculations suggest that, even with minimum annual state pension increases of 2.5%, the gap between the state pension and personal allowance would rise to £1,124 by 2029-30, equivalent to a potential income tax liability of £225 at the basic rate.
Webb also questioned how the system would operate for pensioners with a modest state pension and small private pensions, including whether some would have to reclaim tax already collected through PAYE.
He warned: “If the extra allowance is available only to those on a low income, there could be a growing ‘cliff edge’ problem where those with very small amounts of private income lose the whole allowance and end up worse off than those with nothing”.
