A sweeping tax change to the state pension could become an "administrative nightmare" and leave some claimants as "unhappy losers", according to a money expert. The policy, announced at the Autumn Budget 2025, is designed to ensure that anyone whose only income is the state pension, without additional amounts, does not have to pay income tax.
Tax threshold breach
The full new state pension is set to cross the £12,570 a year personal allowance threshold when payments increase in April 2027. As a result, people whose only income is the state pension would otherwise have to pay income tax on their payments.
The new policy aims to shield those on the state pension alone from this tax burden. However, the specifics of how it will work have yet to be set out, even though it needs to be in place in around eight months' time. Top HMRC officials previously said legislation would need to go through Parliament to enact the new tax exemption.
'Unhappy losers' warning
Hannah Martin, pensions expert and founder of richretiree.com, warned the Government needs to get the implementation right. She said: "The Government is still working out the details of how this will be implemented. Right now it all looks to be an administrative nightmare - and likely to lead to unhappy losers."
Around 13.2 million people currently claim the state pension. HMRC said in January 2026 that around 800,000 to one million pensioners live on the state pension alone.
Ms Martin warned the tax change could lead to glaring inequalities between different people. She said: "This could lead to examples where someone who is on a basic state pension that they top up by working part time, will be worse off than someone claiming the full new state pension, even if they ultimately earn the same amount."
Possible solutions
Ms Martin spoke about the various options the Government could look at to bring in the change. She said: "One proposed solution is to increase the tax allowance for pensioners, so anyone solely dependent on the new state pension would be under the tax threshold. However, this would be an expensive revenue loss for the Government."
Ministers could also adopt a policy to simply cancel any tax bills that people incur on an individual basis. Ms Martin said: "Another idea is to simplify the plan and write off small tax bills to a defined sum for all pensioners, whether their income comes from the state pension or another source."
Government response
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."
The department said work is "underway" on the tax exemption policy and that further details will be set out in due course.
