Chancellor John Healey to introduce tax allowance for low‑income pensioners

Low‑income pensioners to receive new tax allowance

In his first Budget speech, Chancellor John Healey announced that retirees on low incomes will be protected from income tax by a new personal allowance. The change is aimed at preventing the full, flat‑rate state pension – set to rise to £13,036.40 a year from April – from exceeding the £12,570 personal tax allowance that has been frozen since 2021. According to the Treasury, the government has already pledged to exempt individuals whose sole source of income is the state pension from taxation. Healey said the new allowance would fulfil that pledge, although specific details such as the number of pensioners affected have not yet been released.

Background

The state pension is paid in two forms: the basic state pension for older retirees and the new state pension for those who have retired since 6 April 2016. The triple-lock mechanism, which ensures the pension rises by the greatest of inflation, wage growth, or 2.5%, determines the new state pension amount every April.5%. For the relevant month this year, wage growth was 3.9 %, meaning the pension will increase by that percentage. The personal tax allowance, which is the amount a person can earn before paying income tax, has remained at £12,570 since 2021. In 2026, the full new state pension stood slightly below that threshold at £12,547. However, many pensioners also receive income from private or workplace pensions, which can push their total earnings above the allowance. As a result, 9.6 million pensioners are already taxpayers. Rachel Reeves, the former chancellor, vowed that no tax would be levied on those relying entirely on the state pension after it was anticipated to exceed the allowance. That promise was confirmed this year.

Why it matters

The new allowance is significant for the roughly 9.6 million pensioners who already pay tax because their total income exceeds the personal allowance. For those who rely solely on the state pension, the change will mean they will not have to hand any of their pension to HM Revenue & Customs. The policy is intended to reduce the administrative burden on pensioners who would otherwise have to pay a small amount of tax on a pension that is essentially a flat‑rate benefit. The Treasury indicated that the upcoming Budget would avoid the magnitude of tax and expenditure announcements characteristic of prior administrations. Nonetheless, the introduction of a new allowance is a concrete step to protect low‑income retirees from the impact of the pension rise.

What happens next

The Budget is due to be printed later in the day, with the chancellor’s speech likely to be fine‑tuned up until delivery on Wednesday lunchtime. Treasury sources have not yet confirmed the exact mechanics of the new allowance or the number of pensioners it will affect. This declaration occurred while rival political parties, such as the Conservatives and Reform UK, were unveiling their own Budget plans, which included significant reductions in welfare spending. The Liberal Democrats and the Green Party have also called for broader fiscal reforms, but the immediate focus remains on the new tax allowance for low‑income pensioners.