HM Treasury has confirmed in writing that pensioners whose only income is the full new or basic state pension without any increments will not pay income tax, a commitment that holds over the current Parliament under Prime Minister Andy Burnham. The confirmation follows concerns that the full new state pension rate of £241.30 a week, after a basic 2.5 per cent increase next April, would surpass the HMRC personal tax-free allowance of £12,570 a year.
Triple lock and the tax threshold
The full new State Pension currently stands at £241.30 a week. A 2.5 per cent rise next April, the lowest of the three triple lock measures, would push the annual income above £12,570, the HMRC personal tax-free allowance. That would have left retirees seemingly on the hook for income tax bills without intervention.
Prime Minister Andy Burnham has promised not to tax state pensioners who rely solely on the state pension. A HM Treasury spokesperson confirmed this in writing, stating: "Pensioners 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."
Crucial caveat for additional pension and SERPS
The caveat "without any increments" is crucial, as it means anyone in receipt of additional state pension (AP) or the State Earnings-Related Pension Scheme (SERPS) remains at risk of having to pay tax. The Treasury said work is "underway" to bring the policy into effect, and it will publish "further details" in due course.
The Treasury added: "By keeping the triple lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from one of the most generous personal allowances in the G7."
Industry reaction and potential solutions
Kate Smith, head of pensions at pension provider Aegon, said: "If the Government presses ahead with plans to ensure those receiving only the new state pension don't pay income tax, the most likely solution is through changes to the tax system." She noted that whether that is delivered through a new tax code, a higher allowance, or another mechanism remains to be seen, but it would help prevent future triple lock increases dragging more pensioners into paying tax.
Ms Smith added: "Recent comments from the Prime Minister show growing concern about frozen tax thresholds more generally. If changes come, there will inevitably be debate over whether it is fairer to increase the personal allowance for all taxpayers rather than create a special exemption that only benefits pensioners."
