The Government has announced a new tax-free personal allowance for state pensioners, ensuring those with incomes at or under the value of the full new state pension will not pay income tax.
The move follows concerns that some pensioners would be drawn into the tax net if their pension rose above the personal tax allowance, which has been frozen at £12,570.
The full state pension, paid to those who have retired since 2016, will climb to over £13,000 from April. Chancellor John Healey has intervened to ensure pensioners who have the state pension as their sole income will not have to pay tax.
New pension tax allowance announced
Healey has announced the creation of the new pension tax allowance up to 2030 to stop the state pension being taxed. This will affect people retiring over the next few years as well as existing pensioners.
Prime Minister Andy Burnham has so far resisted calls to raise the personal allowance threshold, which has stayed frozen for the last few years.
While the poorest retirees are protected, others will face having to pay tax if they have even modest private pensions or savings pots, or work part-time, reports Birmingham Live.
How the allowance works
Healey said at the Budget: "For pensioners, I'm delivering the new pension tax allowance so that pensioners with income of up to the value of the full new State Pension will not pay income tax in this Parliament."
The Treasury published new guidance which explains how it works. It says: "From April 2027, if your total income is no more than the full annual value of the new State Pension, you will receive the full Pension Tax Allowance and will not be brought into paying tax because of State Pension uprating in this Parliament.
"This applies regardless of where your income comes from, whether that is the State Pension, a private pension, earnings from work, self-employment income, savings, property or dividend income, or a combination of these.
"If your total income is slightly higher than the full annual value of the new State Pension, you may still receive an income tax reduction and pay less income tax than you otherwise would.
"The value of your Pension Tax Allowance will gradually reduce as your income increases until it is fully withdrawn. For every £3 of income above the full level of the new State Pension, your Pension Tax Allowance will reduce by £1."
