Budget to introduce new tax allowance for low-income pensioners

Chancellor John Healey will shield pensioners on low incomes from income tax in his first Budget on Wednesday 28 October, meeting a pledge that people whose only income is the state pension are not taxed¹. The full, flat-rate state pension is expected to rise by 3.9% to £13,036.40 a year from April, which would take it above the £12,570 personal allowance and make it liable for income tax if nothing changed¹. Healey set out the measure in the Budget speech as the new Pension Tax Allowance³.

The allowance is expected to be set at £13,036, with the threshold rising in line with increases in the state pension over the course of this Parliament³. City AM reported that Healey said the government would protect nearly one million pensioners dependent on the state benefit, and that the measure is expected to cost taxpayers £200m a year by 2030, according to pension consultant LCP³. Money Age reported the same £200m figure and said the protection would apply to pensioners whose only income is the state pension, while those with additional income, including private pensions, could still face tax⁴.

The reports differ on timing. BBC News, Money Age and Professional Pensions, writing on 26 October, described the allowance as expected and said the state pension rise would apply "from April"¹. City AM, reporting after the speech, said that from April 2027 the full state pension will rise by £489 to £13,036³. The Treasury had not confirmed how many pensioners would be affected before the Budget¹. Money Age reported that the Chancellor had decided against reducing the maximum tax-free pension lump sum, currently 25% of a pension up to £268,275, which had been speculated to fall to £100,000⁴; Professional Pensions reported he was also set to protect the tax-free lump sum⁵.

Why it matters for households

The change affects pensioners whose income is at or below the value of the full new state pension, a group City AM put at nearly one million people³. Because the allowance is linked to the state pension, the amount of tax ignored grows as the pension rises. City AM reported that in 2027/28 the state pension is expected to reach £250.70 a week, £466.40 above the £12,570 threshold, meaning £93.28 of tax at the basic rate would be ignored; by 2029/30 the pension is anticipated to reach £263.35 a week, or £13,694 a year, exceeding the allowance by £1,124.20 and pushing the tax ignored to £224.84³. Those with income just above the threshold lose the protection, and critics have warned the plans could create a two-tier system among retirees⁴. The allowance sits alongside the existing personal allowance and affects how pension income is taxed.

What happens next

The Budget was due to be printed on the evening of 26 October, with the speech delivered on Wednesday lunchtime¹. The Treasury had not confirmed how many pensioners the allowance will cover¹.