New call for higher income tax threshold for people over State Pension age
The Chancellor Rachel Reeves announced that millions of older people on the State Pension will see their weekly payments increase by 4.1 per cent next year under the earnings growth measure of the Triple Lock policy. Ms Reeves also announced that the Personal Allowance will remain frozen at £12,570 until 2028.
Some 8.1million (64%) older people currently pay tax in retirement, largely due to additional income from workplace or private pensions on top of their State Pension. While the freeze will end in 2028, someone on the full New State Pension over the 2025/26 financial year will receive £11,975.60, leaving just £595 - some £50 per month - before the £12,570 personal tax allowance threshold is exceeded.
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Shortly after the Budget announcement, Lee Anderson (Reform UK) asked the Chancellor in a written question if she would make an assessment of the potential merits of introducing a higher tax threshold specifically for people over State Pension age.
In a Written response on November 1, Treasury Minister James Murray said: “The Government is committed to making sure older people can live with the dignity and respect they deserve in retirement. The income tax Personal Allowance will continue to exceed the basic and full new State Pension in 2024-25.
“This means that pensioners whose sole income is the full New State Pension or Basic State Pension without any increments will continue to not pay any income tax.”
Retirement experts at Spencer Churchill predict around 900,000 more people will exceed the Personal Allowance threshold of £12,570 over the current financial year (2024/25).
State Pension and tax in a nutshell
The full New State Pension will rise from £221.20 to £230.30 each week and as the payment is typically made every four weeks this amounts to £921.20. This will see annual payments rise from £11,502 to £11,975.60 over the 2025/26 financial year.
Similarly, someone on the full Basic State Pension will see weekly payments rise from £169.50 to £176.45, or £705.80 every four-week payment period. Annual payments will rise to £9,175.40 over the 2025/26 financial year.
It's important to be aware that additional State Pension elements, including deferred State Pensions, will rise by the September CPI figure of 1.7 per cent. As the Treasury Minister has also confirmed, older people whose sole income is the State Pension will not pay tax.
Anyone with additional income who does not pay HM Revenue and Customs (HMRC) directly through earnings or pensions, will not receive a tax bill until June or July 2025, which must be paid by the end of January 2026.
The current, full New State Pension is worth £11,502 this year, this leaves just £1,068 before the personal tax threshold is exceeded, so anyone with additional income of £89 or more per month - on top of State Pension - may receive a tax bill next year. Next year, when the annual sum rises to £11,975.60, this leaves just £595 - some £50 per month - before the £12,570 personal allowance is exceeded.
Someone on the full rate of the Basic State Pension currently receives £8,814, leaving just £3,756 before the personal tax threshold is exceeded, equivalent to additional income totalling £313 per month. Over the 2025/26 financial year this will rise to ££9,175, leaving £3,395 before the personal tax allowance has been used - £283 extra each month.
