Chancellor John Healey is expected to announce a rise in the tax-free personal allowance for low-income pensioners in his Budget this Wednesday. The new state pension is set to rise by £489 to £13,036 a year from next April, with official confirmation of this to be announced in the Budget.
This pushes the state pension above the tax-free allowance of £12,570 for the first time. The government has previously promised that those who only receive the state pension as income will be shielded from paying tax, promising further details in the Budget.
Rise to £13,036
The Times reports that this will be done by raising the personal allowance for low income pensioners to £13,036. This would shield almost one million pensioners from paying income tax. It will then continue to rise in line with increases to the state pension over the course of this parliament, the newspaper reports, in a move that is expected to cost taxpayers £200million a year by the end of the decade.
The personal allowance is how much you can earn before you start to pay income tax. However, millions of pensioners with higher incomes will still pay income tax. This includes people with private pensions or those who receive higher state pension amounts.
Pension lump sum decision
The Mirror has contacted the Treasury for comment. It has also been reported that Mr Healey has decided against reducing the maximum tax-free lump sum you can withdraw from your personal pensions, so pension savings outside of the state pension. It had been suggested that the government was considering reducing this from £268,275 to £100,000. You can normally withdraw 25% of your pension pot tax-free up to this level, from the age of 55, though this is rising to 57.
Steve Webb, a partner at pension consultants LCP, said: "The gap between the new state pension and the tax threshold is set to grow every year, which will make the policy hard to switch off. But if it continues, the cost will grow and grow. And if the extra allowance is available only to those on a low income, there could be a growing 'cliff edge' problem where those with very small amounts of private income lose the whole allowance and end up worse off than those with nothing."
Triple lock changes
It comes after Prime Minister Andy Burnham announced that Labour plans to adjust the triple lock, which is used to determine how much the state pension will rise by, from April 2030. The triple lock increases the state pension every April by whichever is higher out of inflation (using the previous September inflation figure), wages (average growth between May and July) or 2.5%.
Under the plans, the state pension would continue to rise every year at least by inflation or 2.5%, but it would still track average wages over time. The state pension overhaul would help to fund a new National Care Service in England.
For next year, the state pension will rise by 3.9% in line with wage growth. This would put someone on the full new state pension on course to receive £250.70 a week from next April – up from £241.30 a week currently. The state pension is based on your National Insurance record, so you may receive less than this if you have gaps in your contributions.
Someone on a full basic state pension would receive £192.10 a week, up from £184.90, under a 3.9% increase. This would put the basic state pension at around £9,989 per year. But many people on the old pension system receive additional top-ups that boost their income. This is known as SERPS (state earnings-related pension scheme) and this is worth a maximum of £230 a week. Some people would also receive higher amounts of the state pension if they deferred their payments.
