Poorest pensioners shielded from income tax – who will benefit most

Pensioners on the lowest incomes won’t have to pay any income tax on their state pension , Chancellor John Healey has announced at the Budget . The new state pension is expected to increase to £13,036 next year – a 3.9 per cent rise in line with earnings under the “ triple lock ” policy. This would take the new state pension above the £12,570 personal tax-free allowance, leaving the prospect of the poorest pensioners being dragged into paying tax.

However, Healey has announced that the tax-free allowance for low-income pensioners will rise to the new state pension level. So those relying solely on the state pension will not have to pay any tax. “I’m delivering the new pension tax allowance, so that pensioners with income up to the value of the full new state pension will not pay income tax in this Parliament,” Healey said in his Budget speech to the Commons. Who will save money?

The move is expected to cost taxpayers £150m a year by 2029-30. The special tax-free allowance will rise in line with state pension increases for the rest of this Parliament. Around 500,000 pensioners are set to benefit, said the Treasury. Around 290,000 will pay no tax at all and another 210,000 will benefit from a “taper” once they go over the threshold. The move will save those living on the state pension £770 by 2031, according to an estimate by Standard Life Centre for the Future of Retirement ahead of the Budget.

However, millions of people with private pension pots will continue to have to pay income tax. Who will have to pay? An increasing number of pensioners have been dragged into tax bills since the personal allowance was frozen in 2021. Around 9.6 million pensioners are paying income tax on their pension in 2026-27, according to HMRC. It is an increase of more than three million people since the allowance was frozen. Budget documents revealed that some people who have a small private income which takes them just above the £13,036 will still benefit from the tax relief through a “taper” system.

“For those with incomes just above the value of the full new State Pension, the allowance will be gradually withdrawn through a taper,” said the Treasury document. While 210,000 in this situation are set to benefit, it is not clear exactly how the taper system will work and how much income a pensioner can get before they are no longer eligible for the tax break. Ahead of the Budget, Baroness Altmann, the former Conservative pensions minister, warned of a “two-tier” tax relief system that would be unfair to older people with only very small private pension pots.

Pensioners with very small private incomes could still pay tax “while those on only the new state pension will be exempt”, she told The i Paper . “We seem to keep adding more complexity and inequality to add some sticking plaster to the current broken system.” Some pensioners with private pots could be worse off Former Liberal Democrat pensions minister Sir Steve Webb, speaking ahead of the Budget, said pensioners with private income over the new state pension could miss out on the tax relief.

There could be a growing “cliff edge” problem where pensioners with small private income end up worse off than those relying solely on the state pension, warned Webb, a partner at financial services firm Lane Clark and Peacock (LCP). Webb warned that Healey’s policy could be hard to “switch off” if there is pressure to raise the tax-free allowance in line with state pension every year. The policy could prove “messy and increasingly expensive”, he added.

Tom Selby, director of public policy at AJ Bell, also said ahead of the Budget that there was a danger of creating “odd incentives and obvious unfairness in the tax system”. “If the proposal means people who only have state pension income benefit while those who have saved privately don’t, those who have saved could understandably argue their diligent behaviour has effectively been punished,” said Selby. End of the triple lock It comes after Andy Burnham announced plans to reform the “triple lock”, a pension increase policy first introduced in 2012.

Protected by all parties over the past decade, it guarantees the state pension rises by whichever is highest of inflation, average wage growth or 2.5 per cent. The Prime Minister said it would be kept until the end of this Parliament. But he had pledged to put changes aimed at having less generous annual increases to voters ahead of the next general election. Savings would fund a new National Care Service, said Burnham. He argued that it makes no sense to preserve the currently generous lock while so many pensioners face huge care costs.

The Government has not yet set out how much pensioners could lose when the triple lock is scrapped. Last week, work and pensions minister Torsten Bell was asked to calculate how much less pensioners could receive each year between 2030 and 2040 compared with keeping the existing system , but he did not give any figures. The Government estimates the change could save £15bn a year by 2039-40, rising to £50bn by 2049-50 in cash terms. In today’s prices, that falls to £11bn and £30bn.