The recent 4.1% rise in the UK state pension brings it within £600 of the income tax personal allowance, sparking parliamentary debate. Concerns have surfaced about the broader financial implications for retirees relying solely on pension income.
The issue has gained prominence after Conservative MP Sir Ashley Fox queried whether the government intended to adjust the personal allowance to match the rising state pension. Treasury ministers have since clarified their position, citing existing policies and forthcoming changes.
Growing Proximity Between Pension and Tax Threshold Raises Concerns
The full new state pension has increased to £230.25 per week, amounting to £11,973 annually, leaving a narrow margin below the £12,570 personal allowance.
Treasury minister James Murray confirmed that pensioners receiving only the full or basic state pension will not pay income tax this year. However, he emphasised that the personal allowance has been frozen until April 2028, a decision made by the previous administration.
According to Murray, while the government remains committed to keeping taxes low, the freeze on personal thresholds was necessary to maintain fiscal discipline. No measures have yet been introduced to specifically align the personal allowance with pension increases, despite calls for adjustment.
The Conservative Party’s prior campaign proposal, termed the ‘triple lock plus’, had promised to protect pensioners by ensuring the personal allowance would rise in tandem with state pensions. Nonetheless, this policy has not been formally adopted, leaving some pensioners vulnerable to crossing the tax threshold for the first time.
Experts Warn of a Cascading Loss of Benefits
Financial specialists have raised concerns that even a slight increase in taxable pension income could result in significant financial setbacks for pensioners. According to Rebecca Lamb, External Relations Manager at Money Wellness, a minor tax liability could lead to ineligibility for Pension Credit, a gateway to a broad range of assistance.
Lamb explained that losing Pension Credit could strip pensioners of support such as Housing Benefit, Council Tax Reduction, free NHS dental and eye care, and eligibility for the Warm Home Discount and Cold Weather Payments. Moreover, the loss of Pension Credit would eliminate access to the free TV licence for individuals over 75.
According to Money Wellness, pensioners could forfeit over £8,000 a year in supplementary benefits if their income exceeds the threshold by a small margin. Lamb highlighted that many pensioners might remain unaware of the broader consequences of a modest pension increase, underlining the need for clear communication and advice.
The government has yet to announce any plans to amend the personal allowance for pensioners, despite increasing scrutiny over the potential financial impact on retirees.
