Budget 2026: Poorest pensioners shielded from income tax
Chancellor John Healey has confirmed he will shield low-income retirees from income tax as the state pension is set to rise above the personal allowance threshold next year, in a move expected to cost the government around £200m a year by 2030.
Healey said the government would protect nearly one million pensioners who are dependent on the state benefit, confirming measures previously announced under former chancellor Rachel Reeves.
He said: “Pensioners, I am delivering the new Pension Tax Allowance- so that pensioners with income up to the value of the full new state pension will not pay income tax in this Parliament.”
From April 2027, the full state pension will rise by £489 to £13,036, but this will push those relying solely on the benefit above the £12,570 personal allowance threshold. The fiscal drag leaves them exposed to income tax.
To prevent them from paying nearly £500, Healey hiked the tax-free allowance for this group to £13,036. It is expected to cost taxpayers £200m a year by 2030, according to pension consultant LCP.
The threshold will rise in line with increases in the state pension over the course of this Parliament.
In the 2027/28 tax year, the state guarantee is expected to rise to £250.70 per week, leaving it £466.40 above the threshold, meaning the scheme would have to ignore £93.28 in tax at the 20 per cent basic rate.
By the 2029/30 financial year the pension is anticipated to climb to £263.35 per week, equal to £13,694 per year, exceeding the allowance by £1,124.20. This pushes the tax ignored up to £224.84.
Increasingly expensive
Advisers have warned this solution is “unfair”, as the gap between the new state pension and frozen tax threshold continues to widen, making the policy harder to “switch off”.
Despite the tax allowance being frozen for the remainder of this Parliament, the gap between the new state benefit and tax threshold will grow, even if it only rises by the 2.5 per cent minimum guarantee, according to Steve Webb, partner at LCP.
The rules are only set to apply to those whose income matches or is below the new state pension, meaning those who find themselves just over the threshold will lose the protection.