The Government has said that pensioners whose only income is the full new or basic state pension without additional increments will not pay income tax under the proposed policy. The details of how the measure will operate have not yet been confirmed, creating uncertainty for people making decisions about when to claim their pension.
Deferral Increases May Remove Eligibility for the Planned Tax Exemption
The issue centres on pensioners who delayed taking their state pension and receive extra payments as a result. Under current rules, people who defer their claim receive an increase in their weekly pension. Those reaching state pension age after April 2016 receive an additional 5.8 per cent for each year of deferral, while people who reached pension age before that date can receive a 10.4 per cent increase or choose a lump sum option.
According to pension consultancy Lane Clark and Peacock (LCP), the planned waiver is expected to help only a minority of pensioners. The organisation estimates that around one in 18 pensioners would benefit from the measure, with the saving expected to be £88 in the 2027-28 tax year, rising to £153 in 2028-29 and £220 in 2029-30.
Former pensions minister Sir Steve Webb, now a partner at LCP, said people with state pension increments, including those linked to deferral, appear likely to miss out on the exemption. He said the uncertainty could make it harder for people deciding whether to delay claiming their pension.
A pensioner who contacted This is Money described his own situation after deferring his state pension in 2020-21. He receives an additional £11.48 a week compared with the standard new state pension, amounting to almost £597 a year. He said this could leave him paying tax while someone receiving the standard payment without increments qualifies for the exemption.
Government Policy Faces Questions Over Unequal Outcomes
The planned measure is intended to prevent people whose only income is the state pension from paying tax when payments rise above the personal allowance threshold. The full new state pension is expected to exceed the current £12,570 income tax threshold, which remains frozen until 2031.
According to the Treasury, pensioners whose only income is the full new or basic state pension without increments will not pay income tax, and the Government remains committed to introducing the policy during the current Parliament.
The proposal could also exclude other groups. People with private pensions or workplace pensions are expected to remain outside the exemption, while those receiving older versions of the state pension with additional payments such as Serps may not qualify because their income includes extra amounts.
Hannah Martin, pensions expert and founder of The Richer Retiree, warned that the implementation process could create administrative difficulties. She said the Government was still working on the details and that the policy could result in different outcomes for people with similar incomes.
Around 13.2 million people currently receive the state pension, while HMRC previously estimated that between 800,000 and one million pensioners live on the state pension alone. The Government has said further details of the tax exemption will be announced in due course. Until the rules are finalised, pensioners considering when to claim their state pension may have to make decisions without knowing whether deferral payments will affect their eligibility.
