Millions of pensioners are set to avoid being pulled into income tax for the first time.
However, those with even a small amount of extra income may not receive the full protection.
Chancellor John Healey announced the new Pension Tax Allowance in Wednesday’s Autumn Budget after the full new state pension rose above the standard tax-free threshold.
Under the triple lock, the full new state pension will increase by 3.9 per cent next April to £13,037.
The personal allowance, which is the amount most people can receive before paying income tax, remains frozen at £12,570.
Without the new measure, someone relying entirely on the full state pension would have faced tax on the £467 difference.
The new allowance effectively increases the tax-free threshold for eligible pensioners so that those receiving only the full new state pension will not have to pay income tax.
The full Pension Tax Allowance is worth up to £94 and applies to pensioners with total incomes between £12,570 and £13,037.
However, the allowance begins to shrink once someone’s income rises above £13,037. For every additional £3 they receive, their allowance is reduced by £1.
Pensioners with total incomes between £13,037 and £13,319 will therefore receive only part of the allowance.
Once their income reaches £13,319 or more, the Pension Tax Allowance disappears completely. They will then pay income tax on everything they receive above the standard £12,570 personal allowance.
All sources of income are counted, including the state pension, private pensions, earnings, savings, property income and dividends.
For example, Alison receives only the full new state pension of £13,037. She will pay no income tax because the new allowance covers the amount above the standard threshold.
David receives £12,900 from his state pension and £242 from a small private pension, giving him a total income of £13,142.
His income is £105 above the £13,037 limit, so his Pension Tax Allowance is reduced by £35. This leaves him with a combined tax-free amount of £13,002, meaning £140 of his income will be taxable.
Meanwhile, Claire receives a basic state pension of £9,989 and a workplace pension of £3,335, totalling £13,324. Because her income exceeds £13,319, she receives no Pension Tax Allowance whatsoever and must pay tax on £754, the full amount above the personal allowance.
Yet the new allowance has drawn criticism for creating a two-tier system between pensioners and workers on identical incomes.
Rachel Vahey, head of public policy, said: “Those still in work have every reason to feel aggrieved too. They could be living on exactly the same £13,037 income, yet still pay £94 in tax with national insurance contributions added on top.”
Consider Evie, a 21-year-old student earning £13,030 a year. She would owe tax on £460 of her income, while a pensioner on the same amount would pay nothing.
Ms Vahey warned that this disparity will only deepen over time. “That tax gap will get wider too, with low income workers seeing the frozen personal allowance bite while low income pensioners are shielded,” she said.
“Expect the questions over intergenerational fairness to grow louder.”
She also argued that pensioners who had saved responsibly could feel their diligence had been punished by the taper.
Beyond the immediate tax fix, Mr Healey also signalled a fundamental shift in how the state pension will grow from the end of the decade.
Starting in April 2030, the triple lock guarantee will be watered down so that annual increases are based on the higher of 2.5 per cent or inflation, with a check against a smoothed measure of average earnings growth rather than the actual figure.
The change is projected to save the Treasury around £50billion. However, the smoothing mechanism means pensioners could lose out during periods when wages rise sharply.
Ms Vahey cautioned that the savings come at a real cost. “Less generous state pension increases and greater uncertainty for people trying to plan for retirement,” she said.
“The Government must be honest about what this change means for pensioners’ incomes over the long term.”
The Chancellor framed the reforms as part of a broader new settlement for UK pensioners, which also includes a new National Care Service.
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