John Healey just changed the state pension rules - and he's made it really complicated

From next April, the full new state pension will rise by 3.9% to £13,036.40 a year under the triple lock. That means it will top the frozen £12,570 personal allowance for the first time . A retiree who receives only the full new state pension would face an income tax bill of £93.28, despite having no other income. To spare pensioners with modest incomes from paying small amounts of tax, Healey confirmed a new Pension Tax Allowance. The intention may be good, but it could prove a nightmare in practice.

This is not an additional tax-free allowance. It’s more complicated than that. Martin Lewis has had a shot at explaining it . Here’s my explanation. Patrick Thomson, head of research analysis and policy at the Standard Life Centre for the Future of Retirement, said those with total income between £12,570 and £13,037 would receive the full allowance. “This is worth up to £94 in the first year, which will then taper away at £1 for every £3 of additional income.

This means that some support is available on incomes up to £13,319. ” The big advantage is that it avoids a cliff edge, where someone earning just above the threshold loses the entire tax benefit. But a cliff edge nonetheless remains. Thomson said the allowance would be applied automatically, making the process easier. “The policy is estimated to cost £45million in the first year but will be a tangible benefit for those affected.” You do not have to receive the full state pension to qualify.

The test is based on total income, including private and workplace pensions, earnings, rental income, dividends and savings interest. Someone receiving a smaller state pension could still benefit if their total income falls below the £13,319 taper threshold. The tax reduction is gradually withdrawn as income rises, disappearing altogether once total income hits £13,319. Rachel Vahey, head of public policy at AJ Bell, said Healey had been “strong-armed into this change” as the triple lock pushes the state pension past the frozen personal allowance.

He may have solved the problem of taxing low-earning pensioners, but at a price, she said. “This is far from an elegant fix. Instead, he has created a new tangle of complexity and unfairness in the tax system.” Vahey gave the example of someone who receives a basic state pension of £9,989 and workplace pension income of £3,335, giving them a total income of £13,324. That’s just £5 over the £13,319 cut-off. As a result, they won’t qualify for the Personal Tax Allowance, but will get the standard £12,570 personal allowance instead.

This means they must pay 20% income tax on £754, leaving them with a £150.80 annual tax bill. If the pensioners earned just £5 less, they would receive a partial tax reduction. Instead, they get no help at all. Vahey said: “Those who have done the right thing and saved could argue their diligence has been punished.” Pensioner tax relief will be applied automatically by HMRC and is due to run for three tax years, to April 2030, before being reviewed.

Working-age people may also feel aggrieved as they have the frozen £12,570 allowance. Vahey said: “They could be living on exactly the same £13,037 income, yet still pay £94 in tax, with National Insurance contributions on top.” The gap could widen as the Pension Tax Allowance rises in line with the state pension, while the personal allowance remains frozen until 2031. “Questions over intergenerational fairness will only grow louder,” Vahey said.

There is another wrinkle. Savings interest may count towards the Pension Tax Allowance income test, even when it falls within the Personal Savings Allowance (PSA) and no tax is due on the interest itself. ISA income does not count, so use your tax-free wrapper if you can. I'm sorry if this is complicated. I didn't write the rules, and I'm struggling to understand them myself.