Chancellor Rachel Reeves has issued a major update for retirees, confirming that those who rely solely on the state pension will not have to pay income tax. This assurance comes amidst growing controversy over the extended freeze on tax thresholds, a policy known as fiscal drag.
Tax Reprieve for Lowest-Income Pensioners
The Chancellor confirmed that individuals whose only source of income is the state pension will be shielded from income tax demands. This clarification directly addresses concerns that pensioners were being pushed into the tax net due to the ongoing freeze on the personal allowance, which has remained at £12,570 since 2021.
Without this intervention, many pensioners faced the prospect of paying tax from 2027. The issue arose because the new state pension has been increasing annually while the income tax personal allowance has been held static. This combination was gradually pulling more retirees over the tax threshold.
The Pressure of Frozen Tax Bands
Last week, Chancellor Reeves faced renewed pressure after confirming an extension of the freeze on income tax bands. This freeze, first implemented in 2021 and controversially extended in the recent Budget, means that as wages and pensions rise with inflation, more people are pulled into higher tax brackets or start paying tax for the first time.
This process is called fiscal drag, and it has been a significant point of contention. The Chancellor's latest statement aims to quieten the political row specifically concerning pensioners on the lowest incomes. However, she noted that retirees with even small additional private pensions will still be liable for tax.
A Guarantee for This Parliament
In a subsequent interview with consumer champion Martin Lewis, Rachel Reeves provided further reassurance. She stated explicitly that "in this Parliament, they won't have to pay the tax." This gives pensioners a clear timeframe for this specific protection.
The announcement provides crucial certainty for a vulnerable group. It ensures that the full value of the state pension increase is retained by those who have no other financial cushion, protecting them from an unexpected tax bill as the pension amount approaches the frozen personal allowance limit.
