UK to raise pensioner tax allowance in line with state pension

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UK pensioner tax allowance 2027

Highlights

Chancellor John Healey will align the pensioner personal allowance with the full new state pension at £13,036 for 2027-28, rising annually thereafter.
The change addresses the full new state pension overtaking the frozen personal allowance of £12,570 in April 2027 due to triple lock increases.
The separate pensioner allowance avoids £90 tax bills for state-pension-only recipients but increases system complexity and cost, especially as the main allowance remains frozen until 2030-31.

Budget plan for pensioner tax threshold

The Guardian reports that full details are due in Wednesday’s budget, with Chancellor John Healey expected to set a personal allowance for low-income pensioners at the same level as the full new state pension. That would mean a threshold of £13,036 in the 2027-28 tax year, with the allowance then rising in line with future state pension increases.

The issue is emerging because the full new state pension is rising faster than the general personal allowance, which has remained frozen at £12,570 since 2021. Under the triple lock, the pension increases each April by whichever is highest among inflation, wage growth or 2.5%, and wage growth of 3.9% is setting the increase for April 2027.

The UK has two state pension systems, with the older basic state pension paid to earlier retirees and the new state pension paid to people who retired from 6 April 2016. This year, the full new state pension stands at £12,547, just below the tax-free threshold, but from April 2027 it is set to move above it.

Costs and complexity for the pensions system

Many retirees already receive income from private or workplace pensions, and 9.6 million pensioners are already taxpayers. The policy focus is on people whose income comes only from the state pension, after an earlier pledge that they would not be taxed as the pension overtakes the standard allowance.

An alternative approach had been to write off small tax bills, as pensioners living only on the state pension would otherwise have owed about £90 next year. A separate allowance could avoid that outcome, but it may also widen the gap between pensioner and non-pensioner tax thresholds while the regular allowance remains frozen until 2030-31 and the triple lock stays in place until 2030.

Former pensions minister Steve Webb says the approach could become messy and increasingly expensive over time. If the extra allowance applies only to those relying solely on the state pension, even a small amount of other income could leave someone paying tax on everything above the standard £12,570 threshold, potentially requiring more complex tapering rules.

Our earlier article on John Healey’s pre-Budget stance explained how the chancellor signalled he would stick to deficit-reduction plans while still aiming to offer some relief for households and support for growth. We also noted the latest UK GDP reading pointing to modest economic resilience, alongside the mounting political pressure over what the Budget should prioritise.

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