State pensioners with no other income will be exempt from income tax under the new Prime Minister, Andy Burnham, it has been confirmed today. Before her departure as Chancellor, Rachel Reeves announced via the Martin Lewis Money Show Live on ITV1 that state pensioners who do not have any other income other than the state pension would not be made to pay income tax. Initially, she had reported in her Budget speech to Parliament that pensioners would not be made to pay ‘small amounts of tax via self-assessment’, but the next day she clarified that this actually meant pensioners would pay no tax at all, much to Martin Lewis’ surprise, as long as they had no other income.
Commitment from new government
Now, new PM Andy Burnham and his new Chancellor John Healey have, via HM Treasury, confirmed to the i Paper that they are committed to this policy and will ensure state pensioners are not dragged into paying tax.
Next April is when the issue would have become a problem, as the triple lock increase - also a policy Andy Burnham has committed to - would increase post-2016 state pension payments to beyond the frozen £12,570 threshold, pushing state pensioners who had never been paying tax before into paying tax on their DWP benefit payments for the first time.
Triple lock and frozen allowance
Crucially, state pensioners have always been liable to pay tax, but those with no other income have never collected enough from the state pension to exceed the threshold. But this will change in April 2027. At the same time, triple lock increases have pushed pension payments higher and higher - this past April, state pensions rose 4.8% - the tax-free Personal Allowance has been frozen at £12,570 since 2021.
This will reach a tipping point in April 2027 when even the minimum 2.5% increase would push pension payments to more than an estimated £12,861 for a new, post-2016 state pensioner with a full National Insurance record.
Existing tax liabilities
Some older state pensioners, of course, are already paying tax. Now-defunct schemes such as the Second State Pension (SERPs), already boost basic state pensioners’ income to beyond the tax threshold today. HM Treasury confirmed to the Express earlier this year that older state pensioners' ‘incremental payments’ such as SERPs would not be exempted from tax.
Of course, Andy Burnham could solve two issues at once if he instead raised the tax-free Personal Allowance. A £500 increase would move the threshold above new full state pension payments and also hand relief to workers and other households battling the cost of living and higher tax bills through fiscal drag.
Expert views
Tom Selby, Director of Public Policy at AJ Bell, said on Thursday that raising the tax-free allowance would help taxpayers ‘across the spectrum’.
He said: “Increasing the personal allowance would help everyone by handing taxpayers across the spectrum the same tax saving. But for the lowest earners, the financial boost will be larger as a proportion of their total income, meaning it would make a big financial difference to those with the least financial strength.” But he cautioned that sticking with the triple lock has ‘serious’ implications for the nation’s finances.
He added: “But the policy of ratchetting up the state pension through the triple lock has serious long-term fiscal implications. The chancellor should be honest about the trade-offs and set out a sustainable policy for the state pension that gives pensioners certainty while recognising pressure on the public finances.”
A HM Treasury spokesperson told the i: “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.”
