The briefing examines calls to increase the tax-free Personal Allowance, reintroduce a special allowance for pensioners and change the way HMRC collects tax as the State Pension continues to rise under the triple lock.
Although the Government has already announced a limited concession from 2027, the report makes clear that campaigners, MPs and tax experts continue to argue that wider changes may eventually be needed.
Why is the issue becoming more important?
The State Pension has always been liable for income tax.
For most retirees, however, that has made little practical difference because the annual State Pension has remained below the Personal Allowance.
That gap is narrowing.
The Personal Allowance has been frozen at £12,570 until April 2031, while the State Pension continues to increase each year under the triple lock.
The Commons Library says this means increasing numbers of pensioners could become liable for income tax in the years ahead, particularly those with workplace pensions, private pensions or other taxable income.
What has the Government said?
Ministers insist pensioners whose only income is the full new or basic State Pension currently pay no income tax, because the Personal Allowance remains higher than the annual pension.
Treasury minister James Murray told Parliament: “The Personal Allowance – the amount an individual can earn before paying tax – will continue to exceed the basic and full new state pension this tax year.
“This means pensioners whose sole income is the full new state pension or basic state pension without any increments will not pay any income tax.”
The Government has also confirmed that from 2027/28 pensioners whose only income is the basic or new State Pension will not receive small tax bills through HMRC’s Simple Assessment process if the pension rises above the Personal Allowance.
Exactly how the scheme will work has not yet been announced.
Experts say the concession only helps a minority
Pension consultants LCP analysed the data earlier this summer and found that that the Government’s planned concession is far narrower than many people realise.
According to LCP, only around 700,000 of Britain’s 13.2 million pensioners -around one in 18 – are likely to qualify.
Former pensions minister Steve Webb, now a partner at LCP, said the policy is the result of two Government decisions colliding.
“Two separate policies – 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.
“This is politically embarrassing for the Government, but the proposed solution is deeply flawed.”
LCP says none of the 8.1 million people receiving the old State Pension will qualify for the concession, while many people on the new State Pension will also miss out because they receive protected payments or have other taxable income.
The consultancy also argues the proposal creates unfair “cliff edges”, meaning someone with just a small amount of additional income could lose the concession entirely.
What changes have been suggested?
The Commons Library outlines several ideas that have been put forward.
One parliamentary petition, signed by more than 281,000 people, called for the Personal Allowance to increase to £20,000.
The Government rejected the proposal, saying it would cost more than £50 billion a year, while Commons Library analysis suggests the total cost could approach £65 billion once National Insurance changes are included.
Another petition, backed by more than 119,000 people, called for the return of a higher age-related Personal Allowance for pensioners.
At the time, Treasury minister Torsten Bell rejected that proposal, arguing it would be expensive and would disproportionately benefit wealthier retirees.
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What happens next?
The Commons Library says ministers have yet to publish the detailed rules for the 2027 concession, despite confirming it remains Government policy.
Tax experts have urged ministers to consult on longer-term reforms, including changing how HMRC collects tax or introducing a broader write-off for small pension tax bills.
Steve Webb believes a wider review is now inevitable: “A general write-off when people have small amounts of tax would probably be a cleaner solution, though a more fundamental review of pension and tax allowance levels is clearly needed.”
For now, there is no change to the way the State Pension is taxed. But with the Personal Allowance frozen and the triple lock continuing to increase pension payments, the Commons Library says the debate over how pensioners are taxed is only likely to intensify.
