State pensioners have been urged to review their tax obligations as new rules are set to take effect soon. The warning comes as HM Revenue and Customs (HMRC) confirmed that legislation will be presented to Parliament shortly.
Background of the Policy Change
In the Autumn Budget 2025, the Labour government announced a new policy aimed at ensuring that individuals whose only online income is the state pension (without increments) will not be subject to income tax. This measure became necessary because, from April 2027, the full new state pension is projected to exceed the personal allowance, meaning that those relying solely on the state pension would otherwise have to pay income tax on their payments.
The current full new state pension stands at £241.30 per week, equating to £12,547.60 annually. This amount is just below the personal allowance of £12,570, which is the standard tax-free threshold for the 2025-26 tax year.
Government Response and Legislative Progress
When asked for an update on how the new policy will function, an HM Treasury spokesperson stated: "Anyone whose only income is the full new or basic state pension without any increments will not pay income tax, and we are committed to that over this Parliament. By keeping the triple lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from the highest personal allowance in the G7."
The department confirmed that work is underway behind the scenes to finalise the policy. This follows remarks from senior HMRC officials in January, who indicated that legislation would be necessary to implement the changes.
Expert Advice for Pensioners
In light of these developments, Hannah Martin, a pensions expert and founder of Rich Retiree, has encouraged pensioners to check their tax situation. She emphasised: "You must declare it. You need to be fully aware of your financial position to ensure you are paying the correct amount of tax. This includes all income, including state pension, private pensions, savings and investments, property income, and part-time work. It’s important to remember that the state pension is taxable and is paid to you gross, so you must declare it as income."
Ms Martin also highlighted types of income that are not subject to tax for pensioners, such as ISAs, the annual personal savings allowance, the annual dividend allowance, and any income earned under the Rent a Room Allowance.
Savings Allowance Changes from 2027
In addition to the state pension tax adjustment, other key changes to savings allowances are scheduled for April 2027. The £20,000 ISA allowance will be effectively reduced: only up to £12,000 of the allowance can be used for cash deposits, with the remaining £8,000 reserved for stocks and shares ISAs. However, state pensioners aged 65 and over will be exempt from this new restriction and will retain the current allowance. Furthermore, the tax rate on taxable interest earnings will increase by two percentage points across all tax bands.
These changes underscore the importance for pensioners to stay informed and seek professional advice to manage their tax liabilities effectively.
