The government will reveal new tax rules for pensioners at the upcoming Budget, pensions minister Torsten Bell has confirmed. The announcement comes as the state pension is set to rise above the income tax threshold for the first time next year.
Triple lock and earnings growth
Under the triple lock guarantee, the state pension increases every April in line with either total earnings growth in the year from May to July of the previous year, CPI inflation in September of the previous year, or 2.5 per cent – whichever figure is highest.
On Tuesday (September 15), the figure for earnings growth was revealed, indicating how much the state pension is likely to rise by next year. The latest figures from the Office for National Statistics (ONS) showed total wage growth, including bonuses, stood at 3.9 per cent in the quarter to July, down from 4.2 per cent in the three months to June.
That suggests an increase in the state pension of nearly £500 a year. However, the figure is subject to revision and the final piece of the triple lock puzzle will not come until inflation figures for September are published in October.
Pension to exceed tax threshold
The latest figures suggest the state pension will rise to around £13,036 for people claiming the full new state pension, which would take it above the income tax threshold for the first time. The personal tax allowance has been frozen at £12,570 since 2021.
The government has so far said that pensioners who are wholly dependent on their state pension, with no private pension, will not have to pay tax if their income breaches the threshold. But details of how the policy will work remain unclear.
In a statement today, pensions minister Torsten Bell said the detail would be outlined in the Budget on October 28. Money saving expert Martin Lewis posted a statement from the minister on his X account. The minister told Mr Lewis: "In line with the commitment made at Budget 2025, pensioners who only just the exceed the personal allowance will not have the administrative burden of paying small amounts of tax in this Parliament. The chancellor will set out further details on how that commitment will be delivered at the Budget."
Experts criticise lack of clarity
Pensions experts have hit out at the government for not making it clear how the new exemption rules will work. Former Liberal Democrat pensions minister Sir Steve Webb, who is now a partner at consultants LCP (Lane Clark & Peacock), warned the government’s move to create a “tax amnesty” for pensioners will only protect one in 16 retirees.
Sir Steve said: "Those on the new state pension can expect to see an increase of nearly £500 per year next April. But the sting in the tail is that this will take the standard rate of the new state pension above the tax threshold. The government’s plans to address this point are a mess, and likely to benefit only a small fraction of pensioners. They will also create unfairness between different groups of pensioners and between pensioners and low-paid workers, who do not qualify for any exemption."
Rachel Vahey, head of public policy at AJ Bell, said: "Although we still need to see September’s inflation figure and any revisions to July’s earnings growth before we know for definite how much it will increase by in 2027, it’s looking very likely that the value of the full new state pension will surge past £13,000 – and the personal allowance – for the first time."
She added: "The Government has said people in receipt of state pension income only above the personal allowance will not have to pay income tax on the benefit, although details on exactly how this will work remain thin on the ground. Up to now, politicians of all stripes have pledged allegiance to the triple lock. But as Chancellor John Healey drafts Budget plans on how the UK can face up to its fiscal challenges, it could be that cracks in this cast-iron support may start to show. The longer this unexploded fiscal bomb is left untouched, the harder it will be to defuse – and the greater the chance proposed state pension age increases will need to be accelerated to balance the books. A sensible approach would be to set a target for the triple lock policy, most likely a value of the state pension as a proportion of median earnings, and then a pledge to peg state pension increases to earnings growth or inflation. Any party that wanted to oppose such an approach would need to present a credible alternative, and keeping the triple lock forever certainly doesn’t fit with the Government’s desire for long-term fiscal responsibility."
Ms Vahey said: "Collecting the little bits of tax owed from millions of pensioners was always going to be an administrative headache for the government. So it’s no wonder they’ve put their tax-collecting thinking caps on to find ways to avoid it. How this policy will work and how any tax will be collected remains to be seen."
