Andy Burnham and John Healey have pledged to protect state pensioners who depend exclusively on the state pension from paying income tax once the personal allowance is frozen at £12,570 from April 2027. However, this exemption applies only to those without any other income; even a small amount, such as a modest workplace pension, will result in tax being charged on the full state pension.
Financial experts from Investing Insiders advised Birmingham Live that there are strategies worth considering, including the timing of drawing private pensions versus the state pension. They emphasise that the best approach depends on each individual’s financial circumstances and recommend consulting a financial adviser for personalised guidance.
The freeze on the personal allowance at £12,570 was extended by former Labour Chancellor Rachel Reeves until 2031. This measure is expected to bring an additional 600,000 pensioners into the income tax net for the first time since retirement, according to consultancy LCP.
To alleviate the burden on those who receive only the state pension, Labour has assured that such pensioners will not face tax charges for the remainder of this Parliament, as stated by Reeves in an interview with BBC and ITV’s Martin Lewis.
There are two types of state pensions: the ‘basic’ state pension for those who reached pension age before 6 April 2016, and the ‘flat-rate’ state pension for those who reached pension age after that date. Many recipients of the basic state pension receive additional earnings-related payments, pushing their annual income above the personal allowance and subjecting them to tax.
Sir Steve Webb, former Liberal Democrats pensions minister, confirmed that those on the older basic state pension will continue to pay tax with no exemptions. He highlighted the resulting unfairness, noting that two pensioners with identical incomes-one on the old basic pension and one on the new flat-rate pension-would face different tax treatments, which is difficult to justify.