Prime Minister Andy Burnham (Image: Getty)
Andy Burnham was warned that increasing the personal allowance for only the poorest pensioners is set to be “messy”. The full new state pension will rise by £489 to £13,036 next April under the triple lock policy.
However, the hike will push it above the frozen £12,570 personal allowance. Chancellor John Healey is expected to announce an increase in the tax-free amount for pensioners with no other income to £13,036 in his statement on Wednesday.
But campaigners and experts warned it risks creating a “cliff-edge” where some older people surviving on modest incomes would end up worse off.
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Former pensions minister Sir Steve Webb, partner at consultants LCP, said: “This scheme is being developed because the repeated freezing of the personal allowance has dragged more and more pensioners into the tax net. But the proposed solution looks messy and increasingly expensive.
“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.”
Silver Voices director Dennis Reed said the plan would “create many more anomalies than it resolves”.
He said: “The proposal is likely to lead to pensioners on broadly the same income being treated differently for tax purposes and only a tiny minority benefitting. What a way to run a whelk stall.
“Even more concerning is that this move on pensioner personal allowances would seem to indicate that the Government is going to do nothing to lift the scandalous freeze on tax thresholds in this week’s Budget.”
Ex-pensions minister Baroness Altmann warned the move could create a two-tier class of pensioners.
She said: “Reports suggest that the Chancellor will announce in this week’s Budget that poorer pensioners will not be dragged into the tax net if they only receive a state pension.
“But how will this actually work? Will this only apply to younger pensioners who receive the new state pension which will be just over £13,000 next year?
“Or will it apply to the over-75s on the old system too? And what about younger workers on incomes slightly above the frozen tax threshold? Will they be exempt too?
“Unless he raises the personal tax allowance for everyone on low incomes, or for all taxpayers, he will create inequity.”
She added: “Trying to get millions of pensioners to fill in tax returns to pay tiny amounts of tax they never knew are owed, will be horrendous in terms of communication and calls to Inland Revenue hotlines from old people who have only ever been on PAYE receiving penalties for not completing a tax return for the money they will suddenly owe.”
Under the plans, reported by The Times, the personal allowance will rise in line with increases in the state pension over the course of this Parliament, costing taxpayers £200 million a year by 2030.
Ministers have repeatedly promised they would prevent people whose only income is the state pension from being hit with income tax.
The personal allowance has been frozen at £12,570 since 2021 and is due to remain at that level until 2031 in a major stealth tax.
However, the state pension will exceed the tax-free amount from next April due to the triple lock, which sees payments rise by whichever is highest out of average earnings, inflation and 2.5%.
Tory Shadow Chancellor Andrew Griffith said: “The Conservatives warned months ago that John Healey needed to give pensioners certainty that they wouldn’t have to spend the last years of their lives filing tax returns or on the phone to HMRC. They have finally listened to the Conservatives’ warnings.
“John Healey must rule out any more tax rises, properly fund defence and stop maxing out our country’s credit card. Fiscal responsibility is the only way we will get Britain back on track.”
Reform UK’s Treasury spokesman Robert Jenrick added: “Burnham can’t help more people with tax relief because he refuses to cut a single piece of wasteful spending.
“Reform would scrap £40 billion of waste so we can raise the tax-free personal allowance to £15,000 for everyone. That would be a tax cut for 40 million people, not just a few.”
It comes as the PM has announced he will scrap the triple lock after the next general election to help pay for his social care reforms.
Under Mr Burnham’s proposals, the state pension would rise each year by inflation or 2.5%, with the automatic link to increases in average earnings dropped
The Daily Express has a long-running campaign to protect the triple lock.
The Treasury has been contacted for comment.
Andy Burnham Warned New Pensioner Tax Plan Will Be ‘Messy’
Andy Burnham is facing fresh questions over pensioner taxation after experts warned that a proposed Budget measure to protect low-income retirees could create a complicated system that leaves some savers worse off.
The proposal, expected to be announced by Chancellor John Healey on Wednesday, October 28, is designed to stop pensioners who rely entirely on the state pension from being dragged into paying income tax as their payments increase. But while the intention is to protect vulnerable retirees, critics argue that the details could produce unfair outcomes for people with modest private pensions or savings.
The controversy comes as the government faces pressure to demonstrate that it understands the financial challenges facing older people. Millions of pensioners are already concerned about rising household costs, frozen tax thresholds and uncertainty over how retirement income will be treated in future.
Why Is the Government Changing the Pension Tax Rules?
The problem stems from the relationship between the state pension and the personal allowance.
The standard personal allowance currently stands at £12,570 a year. This is the amount most people can earn or receive in taxable income before income tax becomes payable. The threshold has been frozen since 2021 and is scheduled to remain unchanged until April 2031 under existing policy. <Cite refs={[“turn181010search1″,”turn181010search12”]}/>
Meanwhile, the full new state pension is expected to rise by 3.9% from April 2027, taking annual payments to approximately £13,036 under the triple lock.
That would put the full new state pension around £466 above the standard personal allowance. If no special arrangement were introduced, a pensioner receiving the full amount and no other taxable income could face an income tax bill of roughly £93 a year.
The government has previously promised that people whose only income is the state pension should not be forced to pay income tax on it. Healey is expected to fulfil that commitment by introducing a higher tax-free allowance for eligible low-income pensioners. <Cite refs={[“turn181010news3″,”turn181010search12”]}/>
The proposed allowance is expected to match the full new state pension at approximately £13,036, with future increases linked to state pension rises during the current Parliament.
The aim is straightforward: prevent the annual pension increase from creating a tax bill for people who have no other income. The challenge is ensuring that the protection works fairly for everyone who might need it.
The ‘Cliff Edge’ That Has Experts Worried
Former pensions minister Steve Webb has warned that the proposal could become increasingly complicated and expensive.
The main concern is eligibility. If the higher allowance is available only to people whose sole income is the state pension, someone with a small private pension could lose the protection even if their overall income is only slightly higher.
For example, imagine two pensioners who both receive the full new state pension. One has no other income, while the other receives a modest workplace pension earned through years of employment.
If the first pensioner qualifies for the higher allowance but the second does not, their tax treatment could differ considerably despite their similar financial circumstances.
Under the ordinary personal allowance, the second pensioner could be liable for tax on income above £12,570. The exact amount would depend on their total taxable income and the final eligibility rules.
Webb has warned that this could create a growing “cliff edge”, where even a small amount of additional income makes someone ineligible for the exemption. He has also questioned whether the arrangement would become increasingly difficult to withdraw as the state pension continues to rise. <Cite refs={[“turn181010search0″,”turn181010search11”]}/>
For pensioners who have saved modest amounts throughout their working lives, the prospect of receiving less favourable tax treatment because they have a small private pension could be particularly frustrating.
Could People Who Have Saved for Retirement Lose Out?
The proposal raises a broader question about how the tax system should treat people with different sources of retirement income.
Many retirees receive a combination of state pension, workplace pension, personal pension and savings interest. Some continue to work part-time after reaching state pension age, while others receive income from investments or property.
These arrangements can produce very different financial circumstances, even when the amounts involved are relatively small.
Silver Voices director Dennis Reed has warned that the proposal could create additional anomalies, with pensioners on broadly similar incomes being treated differently. Former pensions minister Baroness Ros Altmann has also raised concerns about the possibility of creating a two-tier system for older people. <Cite refs={[“turn181010search0″,”turn181010search1”]}/>
Another unresolved question is how the protection would work for people receiving the older basic state pension rather than the newer state pension introduced in 2016.
The two systems pay different amounts, and many older retirees have additional entitlements or income sources. The government will need to explain whether the same principles will apply across the different groups and how HMRC will determine eligibility.
Without clear rules, pensioners could find it difficult to understand whether they qualify and whether they need to take any action.
A Potentially Growing Bill for the Treasury
The proposed tax protection is expected to cost around £200 million a year by 2030, according to estimates cited by pension experts. <Cite refs={[“turn181010news17″,”turn181010search11”]}/>
That figure could rise if the state pension continues increasing while the standard personal allowance remains frozen.
Under the triple lock, annual state pension increases are based on whichever is highest of average earnings growth, inflation or 2.5%. The policy is intended to protect pensioners’ incomes against rising prices and ensure that their payments retain their value relative to earnings.
However, when the state pension rises faster than the tax-free allowance, the gap between the two can widen. Unless the special exemption keeps pace, the same tax problem could return in future years.
Webb has warned that this would make the policy increasingly expensive and difficult to switch off. The government will therefore need to decide whether the protection is a temporary solution or a long-term feature of the tax system.
That decision has implications beyond the immediate Budget. It could affect future spending commitments and the way successive governments approach the taxation of retirement income.
Why Not Raise the Personal Allowance for Everyone?
One alternative would be to increase the standard personal allowance rather than introduce a special arrangement for a particular group of pensioners.
Such a change could help workers and retirees alike, depending on the level of the new threshold. It could also avoid some of the eligibility problems associated with a pensioner-only exemption.
But a universal increase would cost substantially more than a targeted measure, because it would benefit a much larger number of taxpayers.
The government also faces restrictions imposed by its existing fiscal commitments and the pressure to fund public services. A broad increase in the allowance would therefore require ministers to explain how it would be financed.
Reform UK has proposed raising the personal allowance to £15,000 for all taxpayers, arguing that a wider tax cut would be fairer than a pensioner-specific measure. Conservative politicians have also called for greater certainty over the treatment of pension income. These are political proposals, not government policy. <Cite refs={[“turn181010search0″,”turn181010search12”]}/>
The choice facing ministers is between a targeted measure intended to help a specific group and a broader reform that could simplify some aspects of the system but carry a larger price tag.
What Does This Mean for Andy Burnham?
Although Healey is responsible for the Budget proposal, the issue also matters politically for Burnham’s government.
Burnham has positioned the cost of living as a central priority and has said that difficult decisions will be needed to manage the public finances. His government must now show that its approach to pensioners is consistent, understandable and financially sustainable.
The proposed allowance could provide reassurance for eligible pensioners who rely solely on the state pension. But if the final rules exclude people with small private pensions, the government may face criticism from retirees who believe their savings are being treated unfairly.
The wider debate also comes amid discussion about the future of the triple lock. Burnham has indicated that he wants to change the mechanism after the next general election as part of plans to fund reforms to social care. That proposal is separate from the immediate tax allowance measure, but it adds to questions about the long-term treatment of pensioners. <Cite refs={[“turn181010news3″,”turn181010search0”]}/>
For older people planning their finances, the distinction between an immediate tax exemption and a future change to pension increases is important. One affects the amount of income that may be taxed; the other concerns how the state pension itself could rise in later years.
What Pensioners Should Look Out for in the Budget
The details of Healey’s announcement will determine whether the proposal offers straightforward protection or introduces new complications.
Pensioners should look for clarification on several points:
- Eligibility: Whether the higher allowance applies only to people whose sole income is the state pension.
- Private pensions: Whether even a small workplace or personal pension would affect eligibility.
- Older pensioners: How people receiving the basic state pension will be treated.
- Future increases: Whether the special allowance will rise automatically alongside the state pension.
- Tax administration: Whether HMRC will adjust tax codes automatically or require pensioners to make claims or provide additional information.
Until the final arrangements are published, pensioners should not assume that they qualify for the proposed exemption or make financial decisions based solely on reports about the Budget.
A Promise of Protection With Important Questions Remaining
The government’s intention is to prevent low-income pensioners from paying income tax on a state pension that rises above the frozen personal allowance. For people who qualify, the measure could provide welcome reassurance and remove an unexpected tax liability.
But the warnings from pensions experts highlight a genuine design challenge. A system that protects only those with no other income could treat people with very similar finances differently, particularly if a small private pension removes eligibility for the higher allowance.
The government must explain how it will avoid that outcome, how the scheme will work for different generations of pensioners and how the cost will evolve over time.
Wednesday’s Budget should provide more detail. Until then, the proposal remains a targeted attempt to solve a problem created by rising pension payments and frozen tax thresholds—not a universal tax cut for everyone in retirement.
For Burnham and Healey, the test will be whether they can turn the promise of protection into a system that pensioners can understand, that treats people fairly and that remains workable in the years ahead.