The Government is bringing in a major change to tax on the state pension
A major change to the way the state pension is taxed is coming in. But key questions remain about how the policy will work. The update comes after HMRC has confirmed that new legislation will be put before Parliament to introduce the changes.
As state pension payments rise each April, a growing number of claimants are being pulled into paying income tax. The personal allowance remains frozen at £12,570 a year for the foreseeable future, meaning once your income exceeds this threshold, you are liable to pay income tax at 20 per cent. The current full new state pension pays just below this figure, at £241.30 a week, or £12,547.60 a year. Those receiving only the full new state pension will certainly cross the threshold from next April, owing to the triple lock policy.
This pledge ensures payments increase each April in line with whichever is the highest of three measures: the rise in average earnings, inflation or 2.5 per cent. In response to this looming issue, the Government unveiled a new policy at the Autumn Budget 2025. Chancellor Rachel Reeves said she would roll out a policy so that those receiving only the state pension without any additional increments would not be liable for income tax.
New laws coming in
However, the precise details of how this will operate have yet to be outlined by ministers. Senior HMRC officials previously said that legislation will need to pass through Parliament for the changes can be enacted.
Kate Smith, head of public affairs at investment firm Aegon UK, raised concerns that the change could create inequalities, with some people paying tax while others on comparable incomes do not. She explained: “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.”
Depending on what the changes involve, the policy could result in a scenario where someone whose sole income is the full new state pension pays no tax, while someone receiving less than the full new state pension but with additional income such as a workplace pension, totalling the same amount, would be liable for tax.
Your state pension entitlement is determined by your National Insurance contributions. You typically need to accrue 35 years of contributions to qualify for the full new state pension.
‘Higher personal allowance’
You can check your projected entitlement on the Government website. Ms Smith proposed one possible remedy to this disparity where some face a tax bill while others do not.
She suggested: “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.”
The Government was recently asked for an update on its work on implementing the new tax policy. An HM Treasury spokesperson said: “Anyone 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 the highest personal allowance in the G7.”
The department confirmed that work is continuing behind the scenes on the new policy.
