Around one million pensioners could receive additional protection from income tax under plans reportedly being considered for this week’s Budget. The proposal would target retirees who rely mainly on their State Pension as payments rise in 2027.
State Pension Could Rise Above Tax-Free Allowance
The full new State Pension is expected to rise by 3.9% from April 2027. That would take the annual payment from around £12,548 to approximately £13,036.40.
The figure would be above the current £12,570 personal allowance, the amount most people can receive before income tax normally becomes payable.
Without a change to the allowance, pensioners relying solely on the full State Pension could technically face an income tax liability.
Tax-Free Allowance Could Rise To £13,036
Reports suggest the Chancellor could raise the tax-free allowance for pensioners with low incomes to around £13,036. The proposed allowance would match the expected full new State Pension.
It could then rise alongside the State Pension for the remainder of the current Parliament. The plan has not yet been formally confirmed, so the final threshold and eligibility rules could still change.
Around One Million Pensioners Could Benefit
The proposed protection would be aimed at pensioners whose main or only income is the State Pension. Retirees with private pensions or other taxable income would still potentially have to pay income tax.
This could create different tax treatment between pensioners depending on their total income and pension arrangements.
Treasury Cost Could Reach £200 Million
The proposed change is expected to cost the Treasury around £200 million a year by 2030.
It follows an earlier government commitment that pensioners whose only income is the State Pension should not be drawn into income tax solely because their State Pension rises.
The Budget is expected to provide further details about how the protection would work.
Pension Lump Sum Could Remain Unchanged
Pension savers could also receive clarity on another issue in the Budget. Reports suggest the government has decided against cutting the maximum tax-free pension lump sum.
Under current rules, people can normally take 25% of their pension tax-free, subject to a maximum of £268,275. There had been speculation that this limit could fall to £100,000.
The reported decision would leave the existing maximum unchanged.
What Pensioners Need To Watch
The proposed tax protection has not yet been confirmed, meaning pensioners should wait for the Budget announcement before assuming they will qualify. The key points will be the new tax-free threshold, the definition of eligible income and how the allowance will be adjusted in future years.
The expected State Pension increase could otherwise push some low-income retirees above the existing personal allowance for the first time.
