HM Revenue & Customs (HMRC) is considering implementing a new £88 rule that could provide tax relief to millions of state pension recipients. This development comes as the Labour government explores options to alleviate small tax burdens for retirees.
Recent figures from the Office for National Statistics (ONS) reveal that average growth in total earnings, including bonuses, eased to 3.9% for the three months ending in July, down from 4.1% in the previous quarter. This aligns with forecasts from City economists and will influence the increase in the new state pension under the government’s triple lock policy.
The triple lock guarantees that the new state pension rises each year by the highest of three measures: 2.5%, inflation, or average wage growth. If the 3.9% earnings growth figure is applied, the annual new state pension will increase by approximately £488 from April, exceeding £13,000 per year. This amount surpasses the current HMRC tax-free personal allowance of £12,570.
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Martin Lewis, financial commentator and broadcaster, has shared that the government remains committed to ensuring that state pensions do not attract income tax, even when the pension amount exceeds the personal allowance. Posting on social media, Lewis referred to a statement from pensions minister Torsten Bell, which said: “In line with the commitment made at Budget 2025, pensioners who only just exceed the personal allowance will not have the administrative burden of paying small amounts of tax in this Parliament. The chancellor will set out further details on how that commitment will be delivered at the Budget.”
Sir Steve Webb, a former pensions minister under both the Liberal Democrats and Conservative governments, has proposed two possible solutions to address the complication: raising the tax allowance specifically for pensioners or writing off small tax bills for retirees. He suggested HMRC could simply avoid issuing tax bills for amounts up to £88, thereby offering relief to individuals receiving both the old and new state pensions.
Speaking recently, Webb cautioned that the government’s current plan to create a “tax amnesty” will only benefit a small proportion of pensioners, approximately one in sixteen. He explained, “Those on the new state pension can expect an increase of nearly £500 per year next April. However, this will push many above the tax threshold. The Government’s plans to address this point are inadequate and likely to benefit only a small fraction of pensioners. They may also result in unfairness between different groups of pensioners and between pensioners and low-paid workers who do not qualify for any exemption.”
As the government prepares to provide further details at the upcoming Budget, questions remain about how these tax measures will balance fairness and administrative practicality for pensioners across the UK.