Pensioners whose sole income comes from the state pension will be exempt from paying income tax on it until the end of this parliament, chancellor Rachel Reeves has said.
The full new state pension is expected to rise to at least £12,862 from April 2027, under the triple lock mechanism.
It will increase from £11,973 a year now to £12,547 from April 2026, due to wages rising at 4.8%, then by a minimum of 2.5% the following April, taking it to at least £12,862.
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Someone in this position, purely on the state pension, would then breach the personal allowance threshold, which is frozen at £12,570 until 2031. Ordinarily, they would face a tax bill of around £58.
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However, the chancellor has now confirmed that HMRC will not collect tax for people in this situation in 2027/28 and the following two financial years.
This would typically be collected by simple assessment, but the government said in the 2025 Autumn Budget that people whose sole income is the basic or new state pension without any increments would not need to pay “small amounts of tax” via this mechanism. More detail will be set out next year.
In an interview on ITV’s The Martin Lewis Money Show Live on Thursday, 27 November, Reeves said the government was looking at a “simple workaround” to stop state pensioners paying small amounts of tax to HMRC.
She said: “If you just have a state pension, and you don’t have any other pension, we are not going to make you fill in a tax return.”
Pressed on whether this meant these same state pensioners will have to pay any tax, the chancellor said: “In this parliament, they won’t have to pay the tax.”
MoneyWeek asked the Treasury to comment.
Concerns have been raised for those whose only income is the state pension, as they are dragged into paying income tax because of frozen thresholds and rising payments due to the triple lock.
The phenomenon, known as fiscal drag, is pulling millions of taxpayers into paying more tax on their income due to rising wages.
Helen Morrissey, head of retirement analysis at financial services firm Hargreaves Lansdown, said pensioners would be “breathing a sigh of relief” over the chancellor’s announcement.
However, Steve Webb, former pensions minister and now partner at consulting firm LCP, raised questions over whether those on the basic state pension receiving additional amounts, people with private pensions and pre-retiree workers will be exempt from income tax if their incomes tip marginally over the personal allowance threshold.
He said: “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.”
How pensioners can shield themselves from income tax
In 2024/25, an estimated 8.3 million people of state pension age paid tax, up from 7.83 million in 2023/24, according to HMRC.
If you’re one of the millions of pensioners already paying tax on your income, there are steps you can take to reduce your tax liability.
Firstly, you should maximise your tax-free lump sum, which is 25% of your pension pot or up to £268,275 in total, said Morrissey.
Secondly, if you are going to withdraw from your pot through drawdown, try to take out an amount that won’t push you over into a higher tax bracket.
For example, if you are on a full new state pension (£11,973 a year currently) and are drawing down just once in a year, you wouldn’t want to take out more than roughly £40,000 otherwise you’d be tipped into the higher rate tax bracket, based on having no income.
It’s also important to make the most of your ISA allowances, where any interest earned is tax-free. You can currently add up to £20,000 per tax year across any number of ISAs.
You can also defer your state pension, which would reduce your overall income that tax year. When you do come to take your state pension after deferring, the amount you get also increases. If you reach state pension age on or after 6 April 2016, it will rise by just under 5.8% for every 52 weeks delayed, provided you defer for at least nine weeks.
But, Morrisey warned: “You need to be aware that when you do come to take your state pension the higher amount could also have an impact on how much tax you pay.”
