The Department for Work and Pensions and HMRC are set to shield state pensioners from income tax bills if they rely solely on the state pension. As the Triple Lock metric continues to be applied to the state pension, both rates are rising.
The full new rate is being dragged ever closer to the £12,570 HMRC personal tax-free allowance. It is likely to breach the threshold next year, but Labour Party government Chancellor Rachel Reeves has promised to shield retirees from bills.
Expert Insight
Kate Smith, head of public affairs at investment firm Aegon UK, said: "Around 4 million people receive the new state pension and some will have no other income in retirement. Increasingly, due to auto-enrolment, pensioners will have workplace pension savings bringing them above the personal allowance. It would be unfair if those who have saved are treated differently to those who haven't saved in a pension."
She went on: "It could be fairer for all pensioners to have a higher personal allowance. However, arguably this wouldn't be fair to the working age population, who by default would be paying higher income tax as well as National Insurance contributions, potentially creating intergenerational tensions."
Triple Lock Impact
In the Autumn Budget, Ms Reeves confirmed that around 13 million pensioners will see an above-inflation rise of 4.8%. This was thanks to the Triple Lock promise, which guarantees that the State Pension increases annually by the highest of September's Consumer Prices Index (CPI) figure (which stood at 3.8%), or average earnings growth between May and July, or 2.5%.
But the hike means the State Pension is perilously close to the current tax-free personal allowance. As it must rise by at least 2.5% each year, it would mean that from April 2027, someone whose only income is the full new State Pension would earn more than personal allowance.
