Announcements continued to come thick and fast in the aftermath of the budget, with chancellor Rachel Reeves making an important update when it comes to state pension. She confirmed that pensioners whose income is solely the state pension won’t have to pay income tax on it for the remainder of this Parliament.
This addresses concerns that the amount of the full new state pension, which from April will be just a whisker under the threshold for paying basic rate tax, is expected to breach it in 2027/28.
The announcement follows news in the budget that the government is looking at ways to relieve the admin burden on pensioners who may be landed with a tax bill for the first time in the coming years. It was expected that the government would outline options as to how to do this next year and so the announcement came as a surprise.
Read more: Salary sacrifice faces £2k cap but tax-free pension cash stays in budget
It’s a situation caused by the state pension being boosted by the triple lock combined with the long-term freeze in income tax thresholds. This has meant the value of the full new state pension has been creeping ever-closer to the threshold for paying income tax.
This had led to concerns that pensioners could be lumbered with filling out self-assessment tax returns to pay their bill.
The chancellor said the government is working on a solution that means people aren’t being chased for tiny amounts of money, which may also prove quite expensive for HMRC to collect.
The news will be welcomed by pensioners who are in this situation and were worried about what the future might hold for them. However, it is only a temporary reprieve, with the chancellor refusing to be drawn on whether the change will remain long term.
If it were to become permanent, it would likely draw criticism from the many pensioners who do pay tax because they have contributed to a workplace pension. It’s also worth saying that as time goes on the amount of tax that could be payable on a full new state pension will get bigger and so wouldn’t fall into the camp of being expensive to collect.
Read more: What the budget means for your finances
Currently, the reprieve will only last for the duration of this Parliament and we could see potential options for how this tax will be collected outlined next year.
It is also important to say that the budget documents said the situation only applies to those who are only on the state pension “with no increments.” This refers to those pensioners who retired under the basic state pension system and also receive top ups known as the additional state pension (also known as state second pension) which have pushed them into taxpaying territory. The likelihood is that there will be no change for this group who will continue to pay tax.