John Healey has confirmed that from next year, state pensioners whose only income is the full new or basic state pension without any increments will not pay income tax, even when the Triple Lock pushes their pension above the £12,570 personal allowance threshold. The move upholds predecessor Rachel Reeves' promise to shield retirees from tax, but critics argue it creates a deeply unfair two-tier system.
Policy Details
HM Treasury stated: “Anyone whose only income is the full new or basic state pension without any increments will not pay income tax and we are committed to that over this parliament.” This effectively means that pensioners relying solely on their state pension will be exempt, while those with even modest supplemental incomes—such as from a private pension or part-time work—will face income tax on their total income. The personal allowance freeze, which began under previous governments, is the root cause of the issue, dragging more pensioners into the tax net as the Triple Lock increases state pensions annually.
Criticism of Two-Tier System
Steve Webb, a former pensions minister now at consultancy LCP, labelled the policy a “very flawed sticking plaster.” He warned: “This is incredibly difficult to implement and will create all sorts of cliff edges and unfairness. We are talking about next April so people really need to know what is planned and at the moment we still don’t know how this thing will work. It’s time the Treasury set out the plans as people are worried about paying tax for the first time.”
Webb added: “It was the freezing of the personal allowance that created this problem. Now they’re going to fix it for only a very specific, narrow group, which creates unfairness for pensioners with relatively small private pensions and workers on the same income. As far as we can see this will only benefit those on the new state pension as the old pension is only worth about £9,000 a year. So it also discriminates between the old and new state pension. It’s a mess really.”
Anomalies and Unfairness
Dennis Reed from the over-60s campaign group Silver Voices echoed these concerns. He said: “It’s a nonsense really. Healey is simply reiterating what Rachel Reeves promised at the last budget. It’s welcome but they haven’t announced how they’re going to implement it. They’re likely to make more anomalies with whatever mechanism they use. If you have an old state pension, which is less than the personal allowance, but a small private pension which brings you up to the same income as the new state pension, you will be subject to tax, which is completely unfair.”
Reed questioned: “Why should they be punished for that? The only way to deal with this is to raise the personal allowance for pensioners so that whatever the income source you’re exempt from tax up to a threshold.” He also noted additional administrative costs: “There will also be admin costs with this fiddling around as well rather than just resolving the whole problem.”
Under the current plan, around 1 million pensioners who only receive the full new state pension (about £11,500 a year in 2025/26, expected to rise above £12,570 by 2027/28) will benefit. However, those with even a small private pension will be taxed on that additional income, creating a stark divide. The move also overlooks older pensioners on the basic state pension, which is worth roughly £9,000 annually—well below the threshold—but who may have small private pensions that push them into tax.
Implementation Concerns
The Treasury has not yet detailed the implementation mechanism, leaving many retirees uncertain. Experts warn that without clear guidance, pensioners may face complex tax calculations and potential errors. The two-tier approach also raises questions about fairness across generations, as workers on similar incomes without pension exemptions will still be taxed. Critics argue the only lasting solution is a targeted increase in the personal allowance for pensioners or a reform of the Triple Lock itself.
John Healey's confirmation comes amid ongoing debates about the sustainability of the Triple Lock and the rising tax burden on pensioners. With the general election approaching, the issue is likely to remain politically sensitive.
