HM Revenue and Customs (HMRC) is actively developing plans to exempt a significant group of people from income tax bills in a major policy shift. Officials have informed Members of Parliament that they are working to shield recipients of the state pension from a potential tax increase, driven by the ongoing rise of the Triple Lock mechanism.
The Triple Lock Push and the Tax Threshold
From April 2026, the full new state pension is set to increase by more than £500 annually, reaching £12,547.60. This figure falls a mere £22.40 short of the current £12,570 personal allowance, the point at which individuals start paying income tax. This convergence has raised urgent questions about the tax status of pensioners.
HMRC's Automated Solution
Appearing before the Treasury Committee last week, HMRC director Cerys McDonald provided crucial details on the proposed solution. She stated, "I can reassure the committee that we are working hand-in-glove with the Treasury on these options to make sure that the final decision is operable from April 2027."
McDonald emphasised that the process should be seamless for pensioners, adding, "I do not expect there to be any customer requirement here or to apply for this. We should be able to automate it." Typically, HMRC collects tax owed by adjusting the tax code on an individual's private pension via the Pay As You Earn (PAYE) system, as explained by Lily Megson-Harvey, policy director at My Pension Expert.
Relief, Warnings, and Unanswered Questions
The announcement has been welcomed by some in the financial sector. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said pensioners would be "breathing a sigh of relief" over the chancellor's move.
However, experts have also raised important caveats and concerns. Morrissey warned that pensioners must be aware that a higher state pension amount "could also have an impact on how much tax you pay" overall, especially if they have other sources of income.
Steve Webb, former pensions minister and now partner at LCP, highlighted significant unresolved issues. He questioned whether the exemption would apply to those on the basic state pension who receive additional amounts, individuals with private pensions, or pre-retiree workers whose total income only marginally exceeds the personal allowance.
Webb also noted the policy's early stage, stating, "There is no costing for this policy in the Budget documents which suggests that it is still very much an idea rather than a firm plan. But it will be incredibly difficult for the Treasury to come up with something that is workable and fair."
The development marks a critical attempt by the government to address a fiscal anomaly created by the Triple Lock guarantee, but its final form and fairness remain under intense scrutiny.
