Millions of pensioners are waiting to see whether Chancellor John Healey will announce a major change to the tax-free personal allowance in the Budget 2026.
The Government is expected to set out how it will protect people whose only income is the State Pension from paying Income Tax, after next April’s increase is set to push the full new State Pension above the existing £12,570 personal allowance.
According to some reports, ministers are considering raising the tax-free threshold for low-income pensioners to £13,036, matching the projected annual value of the full new State Pension from April 2027.
This could shield almost one million pensioners from Income Tax and cost around £200million a year by the end of the decade.
However, the reported plan would not mean every pensioner becomes exempt from tax. People with private pensions, savings income or other sources of taxable income could still face an Income Tax bill.
State Pension to rise above £13,000 next April
The full new State Pension is on course to increase by 3.9% from April 2027 under the triple lock.
This would take the weekly payment from £241.30 to £250.70, an annual increase of around £489, bringing the yearly total to approximately £13,036.
The increase reflects earnings growth, which is one of three measures used to determine the annual State Pension rise.
Under the triple lock, payments increase each April by whichever is highest of inflation, average earnings growth or 2.5%.
The projected increase would take the full new State Pension above the current £12,570 Income Tax personal allowance for the first time.
The personal allowance is the amount someone can earn in a tax year before they start paying Income Tax.
Without a change to the rules, pensioners whose only income is the full new State Pension could technically have a small amount of income above the standard tax-free threshold.
Who could benefit from the proposed tax change?
The Government has previously promised that people whose only income is the State Pension will be protected from paying Income Tax, with further details expected in the Budget.
The Times reports that ministers intend to achieve this by increasing the personal allowance for low-income pensioners to £13,036.
If introduced as reported, the measure could mean almost one million pensioners avoid paying Income Tax on their State Pension.
The proposed threshold would also rise in line with increases to the State Pension during the current Parliament, according to the newspaper.
However, the details of how eligibility would work have not yet been confirmed.
Steve Webb, a partner at pension consultants LCP, warned that the policy could create difficulties if the higher allowance is restricted to people on low incomes.
He said: “The gap between the new state pension and the tax threshold is set to grow every year, which will make the policy hard to switch off.
“But if it continues, the cost will grow and grow. And if the extra allowance is available only to those on a low income, there could be a growing ‘cliff edge’ problem where those with very small amounts of private income lose the whole allowance and end up worse off than those with nothing.”
The concern is that someone with a small private pension could lose access to the additional allowance and end up paying more tax than someone whose only income is the State Pension.
What about pensioners on the old State Pension?
Pensioners receiving the basic State Pension under the old system will also see their payments increase next April.
Under the projected 3.9% rise, the full basic State Pension would increase from £184.90 to £192.10 a week.
That would amount to around £9,989 a year, leaving it below the existing £12,570 personal allowance.
However, many people who reached State Pension age under the old system receive additional payments on top of the basic pension.
These can include additional State Pension entitlements, such as the State Earnings-Related Pension Scheme (SERPS), meaning their total income may be higher.
The amount someone receives depends on their National Insurance record and individual circumstances. People with gaps in their contributions may receive less than the full new State Pension.
Could the State Pension triple lock change?
The tax proposal comes as the Government has also announced plans to adjust how the triple lock operates from April 2030.
Under the proposals outlined by Prime Minister Andy Burnham, the State Pension would continue to rise by at least inflation or 2.5%, while still tracking average earnings over time.
The Government says the overhaul would help fund a new National Care Service in England.
Any change to the triple lock could have implications for pensioners' future income, particularly as the State Pension continues to rise alongside wages and inflation.
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Will John Healey change the tax-free pension lump sum?
The Budget is also expected to settle questions about whether the Government will change the amount people can withdraw from their private pensions tax-free.
There had been speculation that ministers were considering cutting the maximum tax-free lump sum from £268,275 to £100,000.
People can normally withdraw up to 25% of their pension pot tax-free, subject to the relevant limits and protections. The normal minimum pension age is 55, rising to 57 from April 2028 for most people.
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