Low-income pensioners in the UK are set to receive a new personal allowance aligned with the state pension itself, protecting them from income tax on their state pension payments. The full details will be unveiled by Chancellor John Healey in Wednesday's budget. Under the plan, pensioners relying solely on state pension income will not face a tax bill, reversing a situation where the frozen personal allowance of £12,570 has become lower than the pension itself.
From April 2027, the full new state pension will be worth £13,036 a year, according to the latest figures. This reflects a 3.9% rise determined by the triple lock mechanism, which guarantees the pension will increase by whichever is highest among inflation, wage growth or 2.5%. The new state pension has been rising each April, and currently sits just under the personal allowance threshold. By contrast, the personal allowance applying to most taxpayers has remained frozen at £12,570 since 2021 and is set to stay frozen until 2030-31.
The approach being reported is that Healey will set a higher personal allowance for low-income pensioners matching the full new state pension value of £13,036 for the 2027-28 tax year, rising in line with future pension increases. This differs from an earlier suggestion of simply writing off tax bills below £100. Already, 9.6 million pensioners are taxpayers, many receiving income from private and workplace pensions that pushes them above the current allowance.
However, experts caution the scheme could become problematic over time. Former pensions minister Steve Webb warned it could prove "messy and increasingly expensive". He noted that pensioners receiving even small amounts of private income alongside their state pension could face complications, potentially losing the special allowance altogether and ending up worse off than those with no additional income. The gap between the new state pension and the standard tax threshold is expected to widen each year, creating what Webb described as a "cliff-edge problem".
Webb also highlighted uncertainty around how pensioners receiving the older, basic state pension will receive equivalent protection, given that pension consists of multiple elements and some recipients already receive payments above the current personal allowance. The scheme could mean lower earners without pension income miss out on protection that pensioners receive, raising fairness questions, though extending the allowance to all workers would be significantly more expensive for the government.
For savers and retirees, this means those living on state pension alone will avoid paying tax on their entire pension from April 2027, but those with any additional income may face a sudden loss of the allowance and higher tax bills than they expect.