HMRC sets out key details of tax change for state pensioners

Chancellor Rachel Reeves set out some key tax changes in the Autumn Budget

HMRC has revealed crucial new information about a major shake-up to tax on the state pension. During the Autumn Budget, the Government pledged to ensure that people “whose sole income is the basic or new State Pension without any increments…do not have to pay small amounts of tax via simple assessment from 2027-28 if the new or basic State Pension exceeds the Personal Allowance from that point”.

The policy document confirmed the Government was “exploring the best way to achieve this and will set out more detail next year (2026)”. Currently, you can pocket up to £12,570 annually without facing income tax, but the full new state pension is rapidly approaching this crucial threshold.

At present, the full new state pension pays £230.25 weekly, totalling £11,973 annually. However, payment rates are set to jump 4.8 percent from next April, pushing the amount to £241.30 per week, or £12,547.60 yearly – leaving just over £20 left before using the entire personal allowance.

Thanks to the triple lock policy, the full new state pension will definitely cross the threshold and trigger income tax bills for those on this income alone from April 2027, as things stand. Those on the older basic state pension can receive additional amounts, meaning some claimants whose only income is the state pension are already exceeding the threshold and paying tax.

Following the Budget announcement, Chancellor Rachel Reeves went even further in an interview with Martin Lewis. She told the financial journalist that those whose sole income is the state pension “won’t have to pay the tax [income tax]” during this Parliament.

HMRC faced a grilling from the Treasury Committee this week [January 13] over how the sweeping tax change will actually work in practice. Cerys McDonald, director of Individuals Policy, revealed there are between 800,000 and a million pensioners relying solely on the state pension for income.

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She acknowledged that new legislation would be required to implement the new system, explaining: “We would expect this to go through the next finance bill in the Autumn but we have mobilised a project team already in anticipation of having to make this change.

“The mitigation that we would normally use to recover this tax is simple assessment, normally we wouldn’t be processing that for 2027/2028 until after the 2028 tax year, so we’ve got a decent run in here.”

She said that currently, pensioners whose sole income comes from the state pension receive a simple assessment form following the end of the tax year, which they must complete to settle any tax owed. Ms McDonald informed MPs: “There’s clearly a lot of detail to still work through and she [the Chancellor] has said that that detail will be set out in due course.” She said the new policy will be “operable from April 2027”.

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