John Healey set to shield nearly one million pensioners from income tax

The increase follows the triple lock mechanism, which guarantees the state pension rises by whichever is highest among wage growth, inflation or 2.5 per cent.

This year, that formula will push the benefit up by 3.9 per cent, adding £489 to the annual payment.

Without the allowance adjustment, the pension increase would have pushed thousands of pensioners above the current personal allowance threshold of £12,570, leaving them liable for income tax for the first time.

The Treasury estimates the measure will cost around £200million a year by the end of the decade.

The allowance is also expected to continue rising in step with state pension increases throughout this parliament.

However, the protection only applies to those whose sole income comes from the state pension.

Millions of pensioners who receive additional money from private or workplace pensions will continue to face income tax on their earnings above the threshold.

The announcement amounts to what Steve Webb, a partner at pension consultants LCP, described as a “decidedly pensioner-friendly budget.”

Mr Webb told The Times: “Following the prime minister’s recent announcement on changes to the triple lock, this budget will be designed to reassure pensioners that the government is still ‘on their side’.”

In a further boost for retirees, Mr Healey has decided against cutting the maximum tax-free lump sum that can be drawn from a private pension.

Reports had suggested the Chancellor was considering slashing the cap from £268,275 to £100,000, but he will leave the threshold untouched.

The decision comes after a wave of pension withdrawals last year, driven by fears of a government raid on retirement savings.

Data from the Financial Conduct Authority showed that £91billion was pulled from pension pots in 2025-26, a 75 per cent jump over two years.

Much of that surge was prompted by Labour’s plans to begin levying inheritance tax on pensions from April. First-time withdrawals from retirement pots alone rose by £16billion compared with the previous year.

Despite the pensioner-friendly measures, the broader fiscal picture remains challenging. Government debt is nearing £3trillion, with the Treasury spending £8.8billion on interest payments in August alone.

The Institute for Fiscal Studies has identified a £35billion shortfall to sustain current spending commitments and increase defence funding.

The state pension triple lock itself faces an overhaul. Andy Burnham confirmed at Labour’s conference in September that the mechanism will be reformed from 2030 to help fund an NHS-style social care system, with the wage growth element removed.

Daisy Cooper, the Liberal Democrats’ Treasury spokeswoman, criticised the wider tax burden, saying: “These figures expose the shocking scale of the stealth tax raid started by the Conservatives and continued by Labour.”

Mr Burnham has refused to rule out further tax rises, citing the “challenging” state of public finances.