Treasury shares update on changes to how state pension is taxed | Personal Finance | Finance
A major change to the state pension is coming in soon (Image: Getty)
The Treasury has shared an update about a major change to tax on the state pension. The department says it is “committed” to the new policy, which is due to take effect over the coming months.
As things stand, thousands of pensioners are soon to be moved into paying income tax on their payments for the first time. This is because the full new state pension will from next April move above the personal allowance threshold.
The personal allowance means you can earn up to £12,570 a year without paying income tax. But the new state pension has a current maximum rate of £241.30 a week, or around £12,550 a year.
Looming tax bill
With next year’s triple lock increase in April, the full new state pension will definitely cross the line. This policy ensures state pension payments rise by the highest of three measures, either a 2.5 per cent minimum, the rise in average earnings or the rate of inflation.
Finance experts recently spoke about how much the triple lock increase could be, saying it may well be above the 2.5 per cent floor. With a looming new tax bill for many state pensioners, the Government announced at the Autumn Budget 2025 that it would bring in a new policy, so that people whose online income is the state pension without additional amounts will not have to pay the tax.
Treasury update
But the exact details of how this will work have yet to be made public. As Parliament returns on Tuesday, September 1, the Treasury was asked for an update on the work to implement the policy. The department was also asked if there could be further announcements at this year’s Autumn Budget, which is set for October 28.
HM Treasury spokesperson said: “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. 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.”
The group also said that work is “underway” to bring the policy, saying that it will publish “further details” in due course.
How could the new tax exemption for state pensioners be enacted?
Kate Smith, head of pensions at pension provider Aegon, spoke about the different ways the tax change could be applied. She 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.
“Whether that’s 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.”
‘A special exemption’
She also referred to some recent comments from Prime Minister Andy Burnham. Ms Smith said: “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.”
Mr Burnham told The Times that during his campaign in Makerfield, people had often raised the issue of the personal allowance. The allowance has been frozen at its current level since 2021.
Labour said previously it would allow it to un-freeze from April 2028, but previous Chancellor Rachel Reeves said in her Autumn Statement 2025 that she would continue the freeze for a further three years beyond this, until April 2031.
