Andy Burnham has confirmed support for new HMRC tax rules that would exempt state pensioners from paying income tax on their state pension alone, even when it exceeds the personal allowance threshold from 2027-28. The Labour Party chancellor Rachel Reeves proposed the policy, and Burnham, who won the Makerfield by-election last week, told the i paper he backs it, as reported by City AM.
Stealth tax freeze impact
The government's decision to extend the freeze on income tax thresholds until 2031 represents one of the most significant stealth tax rises in recent years, according to Mike Ambery, retirement savings director at Standard Life (part of Phoenix Group). Originally temporary, the freeze combined with wage growth and inflation pushes more earners into higher tax bands.
From April, the full new state pension will reach £12,547.60 per year, just below the frozen personal allowance of £12,570. However, from 2027-28, the state pension is expected to exceed the allowance, meaning many retirees could technically owe income tax on the state pension alone.
Planned relief for pensioners
The government has confirmed plans to remove the need for Simple Assessments for pensioners whose sole income is the basic or new state pension without increments, easing the administrative burden. Details will be set out next year, with the aim to prevent small tax bills and reduce complexity for those with no other income.
Ambery noted: "Despite this, pensioners with even modest private savings or workplace pensions will still face tax liabilities, and the freeze underlines the importance of planning."
Retirement income shortfall
The state pension remains below Pensions UK’s minimum retirement living standard by around £1,000 a year, so additional saving is essential. There is also a risk that frozen thresholds discourage private saving, as any extra income becomes taxable immediately.
Pensions remain tax efficient. Contributions attract tax relief at your marginal rate, meaning those moving into higher bands could benefit from greater relief. With thresholds locked until 2031, reviewing pension strategy and making use of available allowances is more important than ever.
Ambery concluded: "Ultimately, while the freeze helps the government meet fiscal targets, it highlights the need for individuals to stay engaged with their long-term finances. Taking stock of pension pots and investment choices today can be a powerful way to protect future income."
