New Prime Minister Andy Burnham has confirmed a policy first announced by former Chancellor Rachel Reeves that exempts state pensioners from income tax when the state pension is their only income, even if it exceeds the £12,570 Personal Allowance.
The exemption applies only to pensioners with no other taxable income. The DWP states that taxable income includes the state pension (unless it is the only income), other pensions, earnings from employment and self-employment, and most social security benefits such as Carer’s Allowance. HM Treasury has also confirmed to the Express that increments on pension payments such as the Second State Pension will not be exempted from Income Tax.
The 11 benefits not counted as income
Not all benefits are counted as income for tax purposes. The DWP lists the following as exempt:
- Adult Disability Payment
- Attendance Allowance
- Child Benefit
- Christmas Bonus
- Council Tax Reduction
- Disability Living Allowance
- Housing Benefit
- Pension Age Disability Payment
- Personal Independence Payment
- Scottish Adult Disability Living Allowance
- Social fund payments like Winter Fuel Payment
How the exemption came about
Rachel Reeves announced the measure on the Martin Lewis Money Show Live on ITV1 before leaving the Treasury. In her Budget speech she said pensioners would not be made to pay “small amounts of tax via self-assessment”, but the following day she clarified that pensioners with no other income would pay no tax at all.
The change becomes significant in April 2027. State pension increases under the triple lock have pushed payments higher, while the Personal Allowance has been frozen at £12,570 since 2021. This past April, state pensions rose by 4.8%.
According to estimates, even the minimum 2.5% increase would push payments for a new post-2016 state pensioner with a full National Insurance record to more than £12,861 in April 2027, breaking through the tax threshold.
Treasury statement
An HM Treasury spokesperson said: “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.”
