Thousands of retirees who rely solely on the state pension will be exempt from paying income tax, as confirmed by the new government. The current full state pension stands at £12,547.60 annually, slightly below the £12,570 personal allowance threshold, which is the amount one can earn in a tax year before income tax applies.
The state pension increases annually under the triple lock mechanism, ensuring a rise every April based on inflation, wage growth, or a minimum of 2.5%. It is anticipated that the state pension will surpass the personal allowance for the first time in April 2027.
The Treasury has assured that individuals receiving only the state pension will not be subject to income tax. This aligns with the government’s commitment throughout this Parliament.
Former Chancellor Rachel Reeves had previously announced that individuals receiving solely the basic or new state pension would be exempt from paying tax starting April 2027. It was estimated that about 820,000 pensioners would face income tax liability on their state pension alone in 2027/28, with those having multiple income sources expected to pay tax.
Prime Minister Andy Burnham is facing calls to raise the personal allowance, which has been frozen since 2021 and is projected to remain unchanged until at least 2031. The stagnant tax thresholds have resulted in more people being pushed into paying tax or a higher tax rate as their earnings increase.
The new Prime Minister has stated that there is currently no commitment to alter the tax thresholds but suggested a potential review in the upcoming Budget. He highlighted the challenges of making changes given the prevailing financial circumstances.
Income tax is levied at a rate of 20% above the personal allowance threshold, with a higher 40% rate applicable on earnings exceeding £50,270 and an additional 45% rate for incomes surpassing £125,140.