UK Budget may exempt poorest state pensioners from income tax

Chancellor John Healey will deliver his first Budget on Wednesday, but surging government debt costs leave him little room to manoeuvre. KPMG analysis suggests borrowing costs rose to £24.5bn last month, pushing national debt above £3trn and cutting fiscal headroom from £23.6bn to about £12bn.

Healey has committed to Labour’s 2024 manifesto, ruling out rises to income tax, employee national insurance, or VAT. Any new spending will probably have to be paid for with trade-offs elsewhere.

“will not pay income tax”

The full new state pension is set to rise by 3.9 per cent, or £488, next April, taking it above £13,000. The income tax allowance has been frozen at £12,570 since 2021, meaning pensioners on the full new state pension would normally face a tax bill of around £88 in 2027-28.

The Government has pledged that pensioners whose only income is the state pension will not pay income tax. Daily Mail reports Healey plans to raise their income tax threshold to £13,036, matching the full new state pension rate.

Standard Life estimates the move could save those on just the state pension £93 in the first year and £770 by 2031. The scheme could cost £200 million a year by 2030, according to a report in The Times.

Anyone with even £1 in private pension above their state pension looks set to be excluded from the new tax rate. Former pensions minister Steve Webb warned the change would leave only around 5 per cent of pensioners protected and could create a “cliff edge”.

Pension industry experts say the scheme could create a “two tier” system, penalising over-75s on the old state pension and being seen as unfair by those who saved for old age.