Let's Break it down
Pensioners aged over 75 in the UK are set to be excluded from a forthcoming personal tax allowance linked to state pension increases. The decision follows confirmation from Chancellor Rachel Reeves that individuals whose sole income is the state pension will avoid tax charges.
However, new rules coming into force from 2027 are only set to benefit a small fraction of pensioners, with the majority particularly those on the old state pension left facing potential tax bills as state pension payments rise.
Background on the State Pension and Triple Lock
The state pension is subject to an annual increase under the government’s Triple Lock system. This guarantee means it rises by whichever is highest: inflation, average earnings growth, or 2.5%. Recent updates confirmed the policy will remain in place, with percentage rises determined each year based on official economic data.
Despite the minimum 2.5% increase, many pensioners’ incomes are now approaching the threshold where tax becomes payable, partly because personal tax allowances have been frozen since 2021. The trend is set to continue as state pension payments increase each April.
New Tax Allowance Proposal and Its Scope
From 2027–28, a new personal tax allowance linked to the state pension is set to be introduced. The current full new state pension is £12,547 per year, and with recently announced rises, this could increase by at least £313, making a potential tax-free allowance up to £12,860.
However, analysis by pensions consultancy LCP has found that only about 5.4% of the UK’s pensioners approximately one in 18 are expected to benefit from the scheme. The enhanced allowance is restricted to those who qualify for the new state pension and have no other sources of taxable income.
Impact on Pensioner Groups
There are approximately 13.2 million state pension recipients in the UK, split between those on the ‘old’ and ‘new’ systems. Those who reached state pension age before 6 April 2016 (on the old system) will be automatically excluded from the new allowance according to current rules.
Of the five million or so on the new state pension, many will not qualify due to having additional income, specific protected payments, or being a resident overseas. As a result, millions of older pensioners will not benefit from the intended tax protection.
Restrictions Facing Over-75s
Pensioners over 75 are predominantly in receipt of the basic state pension, which is generally lower than the new state pension. Many supplement their income with payments from the State Earnings Related Pension Scheme (SERPS) or State Second Pension.
However, Chancellor Reeves has not proposed tax protection for these additional elements, leaving such pensioners exposed to future tax bills as their total pension income increases. Under these rules, the older cohort, including those aged over 75, will see no change to their personal tax allowance or additional shielding from rising state pension payments. According to LCP estimates, tax bills for some pensioners could rise to £220 by 2029–30.
Policy Criticisms and Political Responses
Sir Steve Webb, former Pensions Minister, has criticised the split between older and newer pension recipients. He explained, ‘Two separate policies the triple lock uprating of the state pension and freezing of tax thresholds will collide next year. From 2027 onwards, someone with just the new state pension and no other income will start getting annual tax bills from HMRC.’
Webb added, ‘The proposed solution is deeply flawed. It discriminates against those on the old state pension system, even if they have identical income to someone on the new system.’ Chancellor Reeves has stated that the government’s focus is on protecting those reliant solely on the main state pension, but has ruled out extending the exemption to pensioners with income from additional state pension elements.
Final Summary
The latest developments mean that from 2027, only a small proportion of state pensioners will see relief from tax bills as their main income rises. Most older pensioners, especially those over 75 and those receiving the old state pension, will remain excluded from the new tax-free allowance and are likely to face growing tax liabilities in future years.
The decision has drawn criticism for creating disparities between groups of pensioners with similar levels of income. Uncertainty over the future of income tax on pensions underscores the importance of careful financial planning for retirees. For ongoing updates and in-depth analysis of pension and tax policy changes, readers can follow coverage via the Pie app for informed financial decision-making.
