Chancellor Rachel Reeves confirmed the new policy will affect certain claimants
State pensioners are in for a tax break under a new policy – and it will increase over the next few years. As state pension payments continue to move upwards, pushing up people’s incomes, claimants have been hit with increasing tax bills. However, Chancellor Rachel Reeves has confirmed she will be shielding some claimants from an impending tax bill.
The full new state pension currently pays out £230.25 a week. With payments set to rise by 4.8 percent from next April due to the triple lock, this will increase to £241.30 a week, or £12,547.60 a year. This means that from next April, those whose only income is the full new state pension will be just over £20 away from exhausting their £12,570 yearly personal allowance.
Looking further ahead, from April 2027 these claimants will certainly find themselves in the band for paying income tax on part of their payments. This is because the state pension increases each April following the triple lock measure, which ensures payments rise in line with a minimum 2.5 percent, potentially pushing claimants on the full new state pension alone into paying income tax.
The triple lock actually mandates that rates increase in line with whichever is highest: the 2.5 percent floor, or the rise in average earnings, or inflation. This policy has delivered some substantial boosts in recent years, including a record 10.1 percent rise in April 2023.
Tax change confirmed for state pensioners
However, the Chancellor recently stated that even when the full new state pension rises above the personal allowance, those whose only income is the DWP benefit will not pay income tax on their payments. Given the Government’s commitment to maintaining the triple lock, claimants on the full new state pension alone can calculate the minimum amount they will save in tax bills due to this new policy.
On Budget day, the Chancellor announced that the income tax personal allowance and bands will remain frozen at their current levels beyond April 2028 – they were previously set to unfreeze from this date. Using the minimum 2.5 percent increase for the triple lock, this would raise the full new state pension from £241.30 a week to £247.35 a week in April 2027, or £12,862.20 annually.
Tax savings
Under the current rules, this would mean a pensioner solely on the full new state pension would have to pay 20 percent tax on the £292.20 a year they earn above their personal allowance. However, thanks to the Chancellor’s new policy, they would save £58.44 a year in tax.
If payments increased by the minimum 2.5 percent again in April 2028, this would raise the full new state pension to £253.55 a week, or £13,184.60 a year. Pensioners would be exempt from paying income tax on £614.60 of their annual income, saving them £122.92 in tax.
From April 2029, if the 2.5 percent minimum was triggered again, payments would rise to £259.90 a week, or £13,514.80 annually. This implies that pensioners would avoid income tax on nearly £1,000 of their earnings.
They would avoid paying the levy on £944.80 of their income, pocketing a saving of £188.96 in tax.
