The Treasury has confirmed which pensioners won’t have to pay income tax next year
State pension amounts are creeping closer to the personal allowance threshold which could soon make pensioners liable for income tax bills simply by claiming their state pension. This has sparked calls from pensioners, campaign groups and ministers alike for the tax rules to be altered, at least for those in retirement.
Independent MP James McMurdock questioned the Treasury about whether it plans to review the Personal Allowance threshold and raise it in line with state pension levels. The personal allowance has remained frozen at £12,570 since 2021 and the Labour government has previously confirmed it intends to maintain this freeze until April 2028.
Labour MP Torsten Bell replied: “The Government is committed to making sure older people can live with the dignity and respect they deserve in retirement. The State Pension is the foundation of the support available to them.
“Over the course of this Parliament, the yearly amount of the full new State Pension is currently projected to go up by around £1,900 based on the Office for Budget Responsibility’s latest forecast.
“The Personal Allowance – the amount an individual can earn before paying tax – will continue to exceed the basic and full new State Pension in 2025/26.
“This means pensioners whose sole income is the full new State Pension or basic State Pension without any increments will not pay any income tax.”
People are taxed based on their total income, so to avoid a tax bill, pensioners would need to ensure any additional state pension, private pension, employment earnings, taxable benefits and other incomes like property or savings don’t exceed the £12,570 threshold.
By the time the personal allowance freeze ends in 2028, the state pension, currently at £11,973 per year, would have breached this threshold. This would make pensioners liable for an income tax bill even if they have no other forms of income in retirement.
This is due to the triple lock system, which increases the state pension payment amounts in line with the highest of three figures; average UK wage growth, inflation or 2.5%.
Currently, earnings growth is at 4.8% and inflation at 3.8%, meaning the state pension will likely rise by 4.8% next April, roughly equivalent to £570. This would bring the total per year for the new state pension to £12,543, less than £30 away from the personal allowance threshold.
Chancellor Rachel Reeves will confirm exactly how much the state pension will increase by in the Autumn Budget, set to take place on November 26.
According to HMRC figures, 8.7 million pensioners are projected to pay income tax on their retirement income this year, marking a 420,000 increase compared to the last tax year.