Individuals dependent solely on their state pension will reportedly not be required to pay tax on that income, according to Chancellor Rachel Reeves. This proposal could lead to a two-tier system among retirees, distinguishing between those reliant on the basic state pension and those receiving additional benefits.
Starting next April, the new state pension is set to increase to £241.30 weekly, amounting to an annual income just below the personal tax allowance of £12,570. However, with the freezing of tax thresholds, a 2.5% rise in the pension could push it above this threshold by April 2027, potentially resulting in a tax liability for recipients of approximately £58 on £292 of their pensions.
Budget documents from Wednesday highlighted a commitment to reducing the bureaucratic burden for pensioners relying only on the basic or new state pension, exempting them from small tax payments if their pension surpasses the allowance threshold from 2027-28. While this appears to simplify the tax assessment process for some retirees, Reeves indicated in an interview that certain pensioners may not have to pay any tax at all during this parliamentary period.
A Treasury spokesperson confirmed this exemption. However, concerns were raised by Steve Webb, a former pensions minister, regarding the fairness of this approach. He noted that approximately 2.5 million pensioners on the older state pension are already taxed on their income, questioning the implications of this new system for them.
Webb highlighted that the new tax policy may inadvertently disadvantage individuals with small private pensions. He argued that this could result in inconsistencies where pensioners with limited other income avoid tax while employees earning the same amount remain liable for both tax and national insurance contributions. Additionally, he pointed out a lack of financial projections for the policy in the budget documents, indicating that the proposal is still under consideration, with further details anticipated next year.
Source: https://www.theguardian.com/money/2025/nov/28/people-deriving-income-solely-from-state-pension-wont-be-taxed-says-chancellor