The policy comes as the full new state pension is expected to move above £13,000 next April, while the standard personal allowance remains at £12,570. Without an adjustment, that combination could leave some pensioners whose only income is the full state pension with an income tax liability.
According to the Birmingham Mail, Prime Minister Andy Burnham and Chancellor John Healey have confirmed that the tax-free allowance will be raised for pensioners living solely on the state pension. The change is intended to prevent those on relatively low retirement incomes from being brought into the income tax system simply because their pension has increased.
The announcement also addresses a broader interaction between pension increases and frozen tax thresholds. As pension payments rise, a fixed personal allowance means a larger share of retirement income can potentially become taxable, even where the pensioner has no other source of income.
Burnham Says Low-Income Pensioners Will Not Be Drawn Into Income Tax
Burnham used his Labour conference speech to restate the Government’s commitment to protecting pensioners whose income comes only from the state pension. “I can also confirm today our commitment to ensure that the low-income pensioners won’t be dragged into paying income tax in this parliament,” he said, according to the Birmingham Mail.
The current personal allowance is £12,570, the point at which income tax generally begins to apply. The article reports that the state pension is expected to rise above £13,000 next April, which would place the full new state pension above that threshold.
That situation has raised concerns about pensioners being required to deal with relatively small tax liabilities despite receiving no income beyond their pension.
Arj Kumar, co-founder and co-chief executive of Taxd, described the prospect of a pension increase simultaneously creating a new income tax liability as unusual. He said the figures illustrated a problem the Chancellor would need to address.
Pensions Minister Torsten Bell also referred to the administrative consequences. According to the report, Bell said pensioners who only just exceed the personal allowance would not face the burden of paying small amounts of tax during this Parliament, in line with a commitment made at Budget 2025.
Burnham Says Low-Income Pensioners Will Not Be Drawn Into Income Tax
The policy also brings attention to the effect of holding tax thresholds steady while pension payments rise.
Angeline Ong, senior technical analyst at investing and trading platform IG, said her organisation’s analysis showed that continued increases in the state pension alongside a frozen personal allowance could gradually expose more pension income to tax.
She said that if the state pension rose by an average of 2.5 per cent a year while the allowance remained unchanged, almost £3,500 of annual state pension income could become taxable within a decade, potentially producing a tax bill of about £700.
Ong said the Government therefore faced a choice between allowing fiscal drag to reclaim more of the value of the triple lock, making repeated adjustments to tax thresholds, or addressing how the two policies operate together. Bell said the Chancellor would provide further details at the Budget on how the Government intends to deliver its commitment.
