The Labour government's plan to exempt certain state pension claimants from income tax could create significant disparities between pensioners with similar incomes, according to a pensions expert. The policy, announced in the Autumn Budget 2025, aims to ensure that those whose only income is the state pension without additional amounts do not have to pay tax. However, the specifics of who qualifies remain unclear, raising concerns about fairness.
Triple Lock Drives Pension Near Tax Threshold
The state pension increases each April under the triple lock, rising by the highest of 2.5%, average earnings growth, or inflation. The full new state pension currently pays £241.30 per week, or just over £12,550 annually—very close to the £12,570 personal allowance. With the next triple lock boost, those on the full new amount will exceed the threshold and face income tax under current rules.
Hannah Martin, founder of Rich Retiree, warned that the new policy could treat people with similar incomes differently. She said: "It could indeed lead to unfairness between different groups. It's estimated that, of the 13.2 million people currently receiving a state pension, fewer than one million will be covered by the policy."
Groups That May Miss Out
Martin highlighted that pensioners who receive only the basic state pension and supplement it through work or other income would not benefit, even if their total income matches someone receiving the full state pension. She explained: "As an example, someone who only receives a basic state pension and tops it up through work or other means won't benefit, even if they ultimately earn the same amount as someone claiming the full state pension."
HMRC officials have stated that legislation is needed to enact the change, but the policy details have not yet been published.
Alternative Solutions Proposed
Martin suggested possible alternatives to avoid unfairness. One option would be to increase the tax allowance for pensioners so that anyone wholly dependent on the new state pension stays under the threshold. However, she noted this would be an expensive revenue loss for the government. Another simpler approach would be to write off small tax bills up to a defined sum for all pensioners, regardless of income source.
Steps for Pensioners to Understand Their Tax Position
As the tax rules become more complex, Martin advised pensioners to ensure they are fully aware of their financial situation. This includes all income: state pension, private pensions, savings, investments, property income, and part-time work. She reminded that the state pension is taxable and paid gross, so it must be declared as income. Non-taxable income includes ISAs, the personal savings allowance, the dividend allowance, and income from the Rent a Room scheme.
State Pension Age Changes and Forecast
The state pension age is also increasing from 66 to 67 in stages between April 2026 and April 2028. Pensioners with questions about their claim can contact the Pension Service at 0800 731 0469, Monday to Friday 8am to 6pm. Those not yet claiming can use the gov.uk state pension forecast tool to check their expected amount and eligibility date.
