A major new change to how the state pension is taxed could lead to unequal treatment as some have to pay HMRC bill while others don’t. HMRC has confirmed that fresh legislation will go before Parliament to bring in the changes.
As state pension payments increase each April, more claimants are being dragged into paying income tax. The personal allowance remains frozen at £12,570 a year for the next few years, so once your income moves above this you have to pay income tax at 20 per cent.
The current full new state pension now pays only just below this, at £241.30 a week, or £12,547.60 a year. Those on the full new state pension alone will definitely cross the line from next April into paying the levy on their payments, because of the triple lock pledge.
This policy ensures payments rise each April in line with whichever is highest of three measures: the rise in average earnings, inflation or 2.5 per cent. In light of this, the Government announced a new policy at the Autumn Budget 2025, saying that it would make changes so those on the state pension alone without increments would not pay income tax.
News laws coming in
But the fine details of how this will work have yet to be set out by ministers. Senior HMRC officials previously said that legislation will need to go before Parliament to enact the changes.
Kate Smith, head of public affairs at investment firm Aegon UK, said one question here is whether the change could lead to inequalities, as some people pay tax while others with a similar income don’t. She said: “Around 4 million people receive the new state pension and some will have no other income in retirement. Increasingly, due to auto-enrolment, pensioners will have workplace pension savings bringing them above the personal allowance.
“It would be unfair if those who have saved are treated differently to those who haven’t saved in a pension.” Depending on how the policy is implemented, there could be a situation where someone whose only income is the full new state pension does not pay tax, while someone on less than the full new state pension but who has another income stream such as a workplace pension, who has the same total income, does have to pay an amount.
How much state pension you get is based on your National Insurance contributions. You typically need 35 years of contributions to get the full new state pension.
‘Higher personal allowance’
You can check how much you are on track to receive on the Government website. Ms Smith suggested one potential solution to this inequality where some pay tax while others don’t. She said: “It could be fairer for all pensioners to have a higher personal allowance.
“However, arguably this wouldn’t be fair to the working age population, who by default would be paying higher income tax as well as National Insurance contributions, potentially creating intergenerational tensions.”
The Government was recently asked for an update on the work to bring in the new tax policy. An HM Treasury spokesperson said: “Anyone whose only income is the full new or basic state pension without any increments will not pay income tax and we are committed to that over this Parliament.
“By keeping the triple lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from the highest personal allowance in the G7.” The department confirmed that work is going on behind the scenes on the new policy.