The Chancellor has confirmed in an interview with Martin Lewis that pensioners whose sole income is the state pension will not have to pay income tax once it breaches the threshold for paying basic rate tax.

But exempting pensioners from income tax risks creating new unfairness and complexity, according to LCP partner Steve Webb.

The confirmation followed a Budget announcement that government were looking at ways to reduce the administrative burden on pensioners who get landed with a tax bill.

At present the standard rate of the new state pension is set to rise to £241.30 per week or £12,547 per year in April 2026 which is just below the tax threshold of £12,570. 

However, assuming a minimum 2.5% increase in April 2027 (in line with the triple lock), the pension would rise to £247.35 per week or £12,862 per year – almost £300 above the tax threshold.  Someone with just that income would have taxable income over the threshold of £292 per year, and would therefore have a tax bill of around £58.

Such a sum would normally be collected by the ‘Simple Assessment’ process where HMRC does all the calculations and sends the pensioner a tax demand at the end of the year.

The Chancellor has said that HMRC will not collect the tax in this situation and will not do so in 2028/29 and 2029/30 either.

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown, said: “Pensioners will breathe a sigh of relief. However, it is only a temporary reprieve, with the Chancellor refusing to be drawn on whether the change will remain long term. Currently, it will only last for the duration of this Parliament. We can expect to find out more about longer-term options next year.”

Mr Webb said the proposal raises several questions of fairness for people on the ‘old’ state pension, who make up the majority of pensioners, and people with a small private pension income. He said there are currently around 2.5m pensioners on the old system whose state pension on its own is already over the tax threshold.

The Government said the exemption would only apply to people with no other income aside from the state pension. So that would mean someone with £5 a week of private pension income would face full taxation.

Mr Webb said: “The Government has a clear presentation problem when the new state pension goes above the tax threshold in 2027. There is a real risk that pensioners on the new system will be more favourably treated. 

“The new scheme also risks penalising people with small private pensions who will not be protected compared with those who have no private pension who will be protected.  This penalises those who have saved, even modest amounts.

“There is no costing for this policy in the Budget documents which suggests that it is still very much an idea rather than a firm plan.  But it will be incredibly difficult for the Treasury to come up with something that is workable and fair.”