Chancellor's Budget introduces pension tax relief for low-income retirees

Chancellor John Healey will introduce a new tax allowance for low-income pensioners in his first Budget on Wednesday. The move aims to prevent thousands of retirees from being pushed into paying income tax solely because of increases to the state pension. The personal allowance has been frozen at £12,570 since 2021. Without this new relief, pensioners receiving the increased state pension would have exceeded this threshold. Already, 9.6 million pensioners are taxpayers due to additional income from private or workplace pensions.

Chancellor introduces targeted pension tax relief

The new personal allowance for low-income pensioners will be set at £13,036 from the 2027-28 tax year. This figure matches the new full state pension amount. The government has committed to not taxing people whose sole income is the state pension. The protection applies exclusively to that group. The chancellor will reveal full details in Wednesday's budget. The Treasury estimates the measure will cost around £200 million a year by the end of the decade. The allowance is expected to continue rising in step with future state pension increases throughout this parliament.

State pension increase supports affordability measure

The full, flat-rate state pension is increasing by 3.9% to £13,036.40 a year from April. This rise, driven by wage growth, adds £489 to the annual payment. The new tax allowance threshold directly aligns with this higher pension value. The state pension increases annually based on the triple lock, which selects the highest of inflation, wage growth, or 2.5%. The triple lock is confirmed to remain in place until 2030.

Policy details and potential complications

The policy could create a 'cliff-edge' problem. A small amount of private income could cause a retiree to lose the entire special allowance. Former pensions minister Steve Webb warned the setup could become "messy and increasingly expensive." The regular personal allowance for all other taxpayers remains frozen until 2030-31. This new measure marks a partial return to age-related allowances, which were scrapped in 2013-14 by then-Chancellor George Osborne to simplify the system. Daisy Cooper argued the relief would help "ease the huge tax burden weighing people down."

The Budget will be delivered on Wednesday, with the speech likely to be finalized right before delivery. Treasury sources state it will not involve the scale of tax and spending announcements seen in recent years.