Hundreds of thousands of pensioners across the UK have been issued a stark financial warning, as the ongoing freeze on the income tax personal allowance threatens to pull them into the tax net for the first time.
The Looming Tax Threshold
From April 2026, retirees whose sole income is the full new state pension will find themselves perilously close to exceeding their annual tax-free allowance. The full new state pension is set to rise, leaving recipients just over £20 away from using up their entire £12,570 personal allowance.
The situation escalates the following year. From April 2027, with the state pension projected to increase further under the triple lock, these individuals will definitively cross the threshold and become liable for income tax on a portion of their Department for Work and Pensions (DWP) payments.
Chancellor's Intervention and Future Projections
In a significant policy shift, Labour Chancellor Rachel Reeves has moved to shield this group. In comments made to financial journalist Martin Lewis for the BBC and ITV, Ms Reeves confirmed that "people whose only income is the DWP benefit will not pay income tax on their payments", even when the pension exceeds the personal allowance.
This pledge allows for clear calculations of the potential tax savings for those on the full new state pension. The government has committed to maintaining the triple lock, which guarantees annual increases by the highest of inflation, average earnings growth, or 2.5%.
Using the minimum 2.5% increase for modelling purposes, the full new state pension will rise from £241.30 a week to £247.35 a week in April 2027, equating to £12,862.20 annually. Under standard rules, this would create a taxable income of £292.20, incurring a £58.44 tax bill at the 20% basic rate. The Chancellor's policy erases this liability.
The Cumulative Saving by 2029
The protective effect of the policy grows substantially over the following years, assuming the 2.5% minimum rise continues:
- April 2028: The pension is projected to reach £13,184.60 a year. Pensioners would be spared tax on £614.60 of income, saving £122.92.
- April 2029: Payments could hit £13,514.80 annually. This means retirees would be exempt from income tax on nearly £1,000 (£944.80) of their income, resulting in a yearly tax saving of £188.96.
This intervention by the Treasury highlights the direct impact of the frozen personal allowance, a measure announced by the Chancellor on Budget day. While the new policy acts as a safeguard for the most vulnerable pensioners, it underscores the broader fiscal drag affecting millions as tax thresholds remain static while incomes slowly rise.
