The increase follows the triple lock mechanism, which guarantees the state pension rises by whichever is highest among wage growth, inflation or 2.5 per cent.

This year, that formula will push the benefit up by 3.9 per cent, adding £489 to the annual payment.

Without the allowance adjustment, the pension increase would have pushed thousands of pensioners above the current personal allowance threshold of £12,570, leaving them liable for income tax for the first time.

The Treasury estimates the measure will cost around £200million a year by the end of the decade.

The allowance is also expected to continue rising in step with state pension increases throughout this parliament.

However, the protection only applies to those whose sole income comes from the state pension.

Millions of pensioners who receive additional money from private or workplace pensions will continue to face income tax on their earnings above the threshold.

The announcement amounts to what Steve Webb, a partner at pension consultants LCP, described as a “decidedly pensioner-friendly budget.”

Mr Webb told The Times: “Following the prime minister’s recent announcement on changes to the triple lock, this budget will be designed to reassure pensioners that the government is still ‘on their side’.”

In a further boost for retirees, Mr Healey has decided against cutting the maximum tax-free lump sum that can be drawn from a private pension.

Reports had suggested the Chancellor was considering slashing the cap from £268,275 to £100,000, but he will leave the threshold untouched.

The decision comes after a wave of pension withdrawals last year, driven by fears of a government raid on retirement savings.

Data from the Financial Conduct Authority showed that £91billion was pulled from pension pots in 2025-26, a 75 per cent jump over two years.

Much of that surge was prompted by Labour’s plans to begin levying inheritance tax on pensions from April. First-time withdrawals from retirement pots alone rose by £16billion compared with the previous year.

Despite the pensioner-friendly measures, the broader fiscal picture remains challenging. Government debt is nearing £3trillion, with the Treasury spending £8.8billion on interest payments in August alone.

The Institute for Fiscal Studies has identified a £35billion shortfall to sustain current spending commitments and increase defence funding.

The state pension triple lock itself faces an overhaul. Andy Burnham confirmed at Labour’s conference in September that the mechanism will be reformed from 2030 to help fund an NHS-style social care system, with the wage growth element removed.

Daisy Cooper, the Liberal Democrats’ Treasury spokeswoman, criticised the wider tax burden, saying: “These figures expose the shocking scale of the stealth tax raid started by the Conservatives and continued by Labour.”

Mr Burnham has refused to rule out further tax rises, citing the “challenging” state of public finances.

John Healey Set to Shield Nearly One Million Pensioners from Income Tax

Nearly one million pensioners across the UK could be protected from paying income tax under plans expected to be announced by Chancellor John Healey in the Autumn Budget.

The proposed measure is intended to prevent older people who rely on the state pension as their only source of income from being caught by the tax system as their weekly payments increase next year.

The announcement comes at a sensitive time for pensioners, many of whom continue to face pressure from rising household bills, food prices and the cost of heating their homes.

For people living on a limited retirement income, even a relatively small tax bill can make a difference. The government is therefore preparing to adjust the tax rules so that the planned state pension increase does not automatically leave some of the poorest retirees owing income tax.

According to reports published on October 25 and 26, 2026, Healey is expected to raise the tax-free personal allowance for eligible low-income pensioners to match the full new state pension. The Treasury has not yet confirmed all the details of the proposed scheme.

Why Pensioners Could Be Pulled Into Income Tax

The issue stems from the relationship between the state pension and the personal income tax allowance.

Under the current rules, most people can receive £12,570 in annual income before they begin paying income tax. This threshold has remained frozen since 2021, despite increases in wages, prices and pension payments.

Meanwhile, the state pension is due to rise under the triple lock, the mechanism that increases payments by whichever is highest of inflation, average earnings growth or 2.5%.

The full new state pension is expected to increase by 3.9% from April 2027, reaching approximately £13,036.40 a year.

That would place the annual payment above the standard £12,570 tax-free allowance for the first time.

Without a change to the rules, someone receiving the full new state pension and no other income could technically become liable for income tax on the amount exceeding the threshold.

The difference would be approximately £466 a year. At the basic income tax rate of 20%, that would produce a bill of around £93 annually.

Although this is a relatively modest sum, it could create an administrative burden for pensioners who have never previously needed to pay income tax.

The government has already committed to ensuring that people whose only income is the state pension will not be required to pay income tax on it. Healey’s proposed allowance is intended to deliver on that commitment.

How the New Tax-Free Allowance Could Work

Under the reported proposal, eligible low-income pensioners would receive a higher personal allowance aligned with the full new state pension.

If the allowance rises to approximately £13,036, a pensioner receiving that amount from the state pension alone would remain below the relevant tax threshold.

The arrangement is also expected to increase in line with future state pension rises during the remainder of the current parliamentary term.

This would help prevent the same problem from returning each year as pension payments rise while the standard personal allowance remains frozen.

Reports suggest the measure could cost the Treasury around £200 million annually by 2030.

However, the exact eligibility criteria, administrative arrangements and treatment of pensioners receiving different types of state pension have yet to be fully confirmed.

These details will be important in determining who receives the protection and whether the scheme creates complications for people with small amounts of additional income.

For pensioners who depend entirely on the state pension, the proposal could provide reassurance that an increase intended to support their living standards will not be partly offset by an unexpected tax bill.

Who Will Benefit From the Changes?

The main beneficiaries are expected to be low-income pensioners whose only income comes from the state pension.

For these individuals, the higher allowance would prevent the state pension increase from pushing them into income tax simply because their annual payments have crossed the existing threshold.

However, the measure is not expected to exempt every pensioner from income tax.

Millions of retirees already receive income from workplace pensions, private pensions, investments or other sources. Depending on their total taxable income and the final eligibility rules, they may continue to pay tax.

This distinction is likely to become one of the most debated aspects of the policy.

A pensioner who receives only the state pension could qualify for the higher allowance, while another person with a small additional private pension might not receive the same protection.

Critics argue that such a system could create an unfair difference between retirees with similar overall incomes.

Supporters, meanwhile, say the measure is targeted at people who have the least financial flexibility and are most vulnerable to increases in essential living costs.

The final design will determine whether the scheme can protect those most in need without creating unnecessary complexity for pensioners who have saved for retirement.

The Triple Lock Remains Central to the Debate

The triple lock has long been one of the most significant policies affecting retirement incomes in Britain.

It was designed to prevent the state pension from losing value relative to earnings and inflation over time.

Under the mechanism, the pension rises according to whichever is highest among the relevant inflation figure, earnings growth or 2.5%.

For many pensioners, the system offers a degree of certainty that their regular income will increase each year.

However, the interaction between rising pensions and frozen tax thresholds has created a growing policy challenge.

When payments increase but the amount people can earn tax-free does not, more people can be drawn into paying tax. This is commonly described as fiscal drag.

The proposed pensioner allowance would address one consequence of that process for a specific group, rather than necessarily changing the tax threshold for everyone.

The government must therefore balance two competing objectives: protecting the purchasing power of pensioners while managing the cost of public spending.

Increasing the standard personal allowance for every taxpayer could provide wider relief, but would generally cost considerably more than a targeted pensioner measure.

Could the Policy Create a New Tax Divide?

Although the proposal could help pensioners who rely solely on the state pension, it has also raised questions about fairness.

Some retirement specialists have warned that a separate allowance for low-income pensioners could create a sharp difference between people who receive the state pension alone and those who have modest additional retirement savings.

For example, a person with a small workplace pension could potentially face a different tax outcome from someone with a similar overall financial position who receives no additional pension income.

The precise impact would depend on the final rules, including whether eligibility is restricted to those whose only income comes from the state pension or whether some form of tapering is introduced.

A taper would gradually reduce the extra allowance as additional income rises, potentially avoiding a sudden loss of tax protection.

However, tapering can make tax systems more complicated and harder for individuals to understand.

There are also questions about people receiving the older basic state pension, whose retirement income arrangements differ from those of people covered by the newer system introduced in 2016.

These issues will need to be addressed if the government wants the scheme to be simple, predictable and fair.

Pensioners Still Face Pressure From Living Costs

The proposed tax protection comes as many older households continue to manage tight budgets.

Energy bills, food costs, housing expenses and other essential payments can consume a substantial share of a pensioner’s monthly income.

People who rent their homes or have limited savings may be particularly exposed to unexpected expenses.

For those living on the state pension alone, a tax bill of around £93 a year may appear small in comparison with other household costs, but it still represents money that could otherwise be spent on necessities.

The government will also face pressure to explain how the proposed tax allowance fits alongside other support for older people, including pension increases and assistance with energy costs.

Pensioners with additional savings or private pensions may want reassurance that the tax arrangements will not discourage people from putting money aside for retirement.

A policy that protects people with no other income but creates unexpected tax disadvantages for modest savers could generate further calls for reform.

What Happens Next?

Healey is expected to set out the government’s plans in the Budget scheduled for Wednesday, October 28, 2026.

Until the announcement is made, the reported allowance and its eligibility conditions should be treated as proposals rather than fully confirmed rules.

Pensioners will need clear information about whether they qualify, how any higher allowance will be applied and whether they need to take action themselves.

The government will also need to explain how the measure will operate alongside existing tax rules and future increases in the state pension.

For eligible pensioners, the central objective is straightforward: an increase in the state pension should not automatically create an income tax bill for someone whose only income is that payment.

Yet the wider policy questions are more complicated. Ministers must consider fairness between different groups of retirees, the long-term cost to taxpayers and the interaction between pension increases and frozen tax thresholds.

The proposal could provide meaningful reassurance to people who depend entirely on the state pension. Its ultimate effectiveness, however, will depend on the details announced in the Budget and how the new system works in practice.