Next year’s tax on state pension payments may no longer be implemented if the Labour Government implements a rumoured policy change by April 2027.
Chancellor John Healey and Prime Minister Andy Burnham are understood to be considering raising the tax-free personal allowance by £3,000 to offer a financial boost to low-earning households.
The allowance, which is the threshold at which someone begins to pay income tax to HM Revenue and Customs (HMRC), would be raised from £12,570 to £15.570.
This threshold has been frozen at the same level for the last five years and was set to remain at £12,570 until at least 2028 under current Government policy.
A looming state pension tax could be avoided if the personal allowance is raised
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GETTYDue to the triple lock, the full, new state pension is set to cross the personal allowance threshold next year, which would see older Britons pay tax on their retirement benefit alone for the first time every.
Under the payment uprate mechanism, state pension payment rates increase annually by either the rate of inflation, average wage growth, or 2.5 per cent; whichever is highest.
Based on figures from the Office for National Statistics (ONS), earnings for the 12 months to July 2026 came in at 3.9 per cent and will likely be used to determine how much state pensions will go up by.
Graph projects the number of retirees facing a stealth tax on their state pensions will rise in the coming years | Chat GPT
The personal allowance and basic rate income tax band have been frozen until 2028 | GETTY
The state pension is expected to rise above £13,000 next April, potentially leaving someone relying solely on the full new state pension with an income tax liability for the first time.
However, a policy proposal from Labour donor Dale Vince calling for the personal allowance to be raised could result in this stealth tax raid on retirees being avoided.
Arj Kumar, co-founder and Co-CEO of Taxd, previously said: “There is something pretty extraordinary about giving somebody an increase in their state pension and potentially turning them into an income taxpayer at the same time.
“The Chancellor has spent the past week talking about getting Britain growing, but these figures show the problem he needs to solve because businesses are already becoming more cautious about hiring.”
Torsten Bell previously said the Government had not made a decision on the state pension | HOUSE OF COMMONS
Angeline Ong, senior technical analyst at investing and trading platform IG, added: “Our analysis shows that if the state pension continues rising by an average of 2.5 per cent a year while the personal allowance stays frozen, almost £3,500 of annual state pension income could be taxable within a decade, creating a potential tax bill of around £700.
“The Government therefore faces a growing choice between allowing fiscal drag to quietly claw back more of the triple lock each year, making repeated adjustments to tax thresholds, or confronting how the two policies work together.”
It should be noted the Government has promised to protect financially vulnerable retirees who are reliant on their state pension to pay for bills.
Pensions Minister Torsten Bell said: “In line with the commitment made at Budget 2025, pensioners who only just exceed the personal allowance will not have the administrative burden of paying small amounts of tax in this Parliament.
“The Chancellor will set out further details on how that commitment will be delivered at the Budget.”