John Healey will put people off saving if his new plan goes through (Image: Getty)
Next April, the full new state pension is expected to jump 3.9% to £13,036 a year, under the triple lock. It means that for the first time, the state pension will climb above the personal allowance, which has been frozen at £12,570 all the way to 2031. Someone getting the full new state pension will exceed that by £466, and face an automatic £93 income tax bill. Reeves promised to protect them, but was fired before confirming the details. Now Healey has hit on a solution. He’s reportedly preparing to raise the tax-free personal allowance to match the state pension at £13,036. But only for pensioners with no other income sources whatsoever.
Around one million pensioners could benefit. But the proposed fix risks sending a dreadful message to millions who have saved for retirement. Because anybody who gets even a single penny of income from another source, such as a small private pension, taxable savings or part-time earnings, won’t benefit from his exemption. Their personal allowance will remain frozen at £12,570. So they will pay tax on any state pension above that level, and on their other income too. But someone who never saved is rewarded with a higher £13,036 allowance. This is madness. Why bother putting money aside if the reward is to fall foul of a two-tier system?
Pensions firm Standard Life said Healey’s exemption could save those purely on the state pension a mighty £770 a year, if it is still in place by 2031. That’s a major benefit. But it is reserved for pensioners who never saved, or who did save but then spent the lot. Someone who has put aside money for their final years, even a tiny bit of pension, will lose all that. They could get round that by blowing their retirement savings, presumably, but that’s the lost thing we want pensioners to do. It’s an absolute disaster in the making.
Kate Smith, head of pensions at Aegon, warns that favouring people who have not built up additional retirement savings risks making those who have done the right thing and tucked money away feel punished for their efforts.
Tom Selby of AJ Bell said Healey risks creating “a mess of complexity, odd incentives and obvious unfairness in the tax system” “If the proposal means people who only have state pension income benefit while those who have saved privately don’t, those who have saved could understandably argue their diligent behaviour has effectively been punished.”
Former pensions minister Ros Altmann fears the plans could create an age penalty, too. Younger pensioners receiving the new state pension could escape tax on £13,036, while older pensioners on the basic state pension who get less than that amount may pay tax on it.
The basic state pension will be worth roughly £9,990 next year. That’s well below the proposed new £13,036 personal allowance. But many will also get extra payments through the State Second Pension or Serps, which are taxable.
Altmann said this could mean they pay tax while some under-75s on the new state pension will be tax exempt, despite having a similar or higher income. “This would create serious inequity in the tax system,” she said. Many basic state pensioners already feel hard done by and this would only make them feel more aggrieved.
The longer the £12,570 threshold remains frozen for some, the wider the gap between the state pension and the tax-free allowance will become, and the greater the sense of anger. This doesn’t bode well for Andy Burnham, who has already angered pensioners by threatening to axe the triple lock.
What a total mess. It’s already hard enough to persuade people to save for retirement. A system that makes pensioners suffer for setting money aside will only make it harder. Why bother if their reward is this clumsy tax botch? That’s the question millions will be asking themselves if Healey pushes this through in Wednesday’s Budget.
John Healey to Punish State Pensioners for Doing the Right Thing – Total Kick in the Teeth
Chancellor John Healey is facing mounting criticism over a proposed tax change that could leave millions of British pensioners questioning whether saving responsibly for retirement has been worth the effort.
The controversy centres on the Government’s expected plan to protect pensioners who rely entirely on their state pension from paying income tax, while those with even a small amount of additional private pension income could miss out on the same protection.
Critics say the proposal risks creating an unfair two-tier system, rewarding people whose only retirement income comes from the state while leaving some pensioners who have saved throughout their working lives facing a tax bill.
For people who spent decades working, paying National Insurance contributions and putting money aside for later life, the distinction could feel like a punishment for doing precisely what successive governments encouraged them to do.
The issue has become particularly urgent because the full new state pension is expected to rise to approximately £13,036 a year from April 2027. That would take it above the existing income tax personal allowance of £12,570, which is frozen until 2031 under current plans. <Cite refs={[“turn644793search0″,”turn644793search3”]}/>
The Government says it intends to honour its previous commitment that people relying solely on the state pension will not face income tax simply because annual increases push their payments above the threshold.
However, the precise eligibility rules for the proposed protection have become the source of intense debate.
Why pensioners could face an unexpected tax bill
The personal allowance is the amount of income most people can receive before they begin paying income tax.
At present, the standard allowance is £12,570 a year. The full new state pension is expected to reach around £13,036 in April 2027, exceeding that threshold by approximately £466.
If no special arrangement were introduced, that difference could create an income tax liability for pensioners receiving the full new state pension.
At the basic income tax rate of 20%, tax on £466 would amount to approximately £93 a year.
That may appear relatively modest, but for pensioners living on a fixed income, every pound matters. Many already face rising costs for food, heating, housing, transport and essential household expenses.
The Government is expected to address the problem by introducing a higher personal allowance for pensioners whose only income is the state pension.
Under the reported proposal, the allowance would match the full state pension, preventing eligible recipients from paying income tax on that pension alone.
The difficulty is that pensioners with additional income could be excluded from the special arrangement.
That distinction has prompted critics to question whether the Government is protecting the most financially vulnerable fairly or creating new disadvantages for people who have made their own provision for retirement.
The people who saved could be left worse off
For many retirees, a private pension is not a sign of wealth. It is the result of years of modest contributions from wages, sometimes supplemented by employer contributions, intended to provide a little extra security in old age.
Some pensioners may have accumulated only a relatively small private pension. Others may receive a modest occupational pension from a career in public service, manufacturing, retail or another sector.
Under the reported proposal, even a small amount of additional income could prevent a pensioner from qualifying for the higher allowance.
That creates a potentially uncomfortable contrast between two people with similar financial circumstances.
One pensioner whose income comes exclusively from the state pension could qualify for the higher tax-free threshold.
Another pensioner with the same state pension plus a small private pension could remain subject to the ordinary personal allowance and potentially pay tax on income above £12,570.
The second pensioner might have worked just as hard, made regular contributions and attempted to reduce their dependence on the state.
Yet the existence of that additional retirement income could leave them facing a tax bill that their neighbour avoids.
Pensions experts have warned that this type of eligibility rule risks creating a financial cliff edge, where a small amount of additional income produces a disproportionately large difference in tax treatment. <Cite refs={[“turn644793news10″,”turn644793news12”]}/>
For those affected, the question is straightforward: why should someone be disadvantaged for taking steps to support themselves in retirement?
A damaging message about saving for old age
The controversy goes beyond the immediate amount of tax involved.
Governments have repeatedly encouraged workers to save for retirement through workplace pensions and personal savings. The purpose is to help people maintain their living standards after leaving employment and reduce pressure on public finances.
A policy that appears to favour pensioners with no additional income over those who have built up private savings could undermine that message.
People approaching retirement may begin to wonder whether making additional contributions will leave them worse off than if they had relied entirely on the state pension.
That does not mean every pensioner with private savings would necessarily lose financially overall. A private pension provides additional income, and the exact outcome depends on the amount received, other income and the final rules.
Nevertheless, the concern is that the tax system could create an incentive that runs against the Government’s wider objective of encouraging personal responsibility.
Pensioners who saved £20 or £50 a month throughout their working lives may understandably resent being treated differently from people who did not have the same additional income.
The danger is that a measure intended to protect vulnerable retirees could create resentment among another group of people who also need financial security.
The triple lock adds to the pressure
The dispute comes as the future of the state pension triple lock remains a major political issue.
Under the triple lock, the state pension rises each year by whichever is highest of inflation, average earnings growth or 2.5%.
The mechanism is designed to protect pensioners’ spending power and ensure that the state pension does not fall too far behind wages over time.
The expected 3.9% increase from April 2027 would raise the full new state pension to approximately £250.70 a week, or around £13,036 a year. That increase is also what creates the immediate clash with the frozen personal allowance. <Cite refs={[“turn644793news14″,”turn644793search1”]}/>
The Government now faces the challenge of balancing pension increases with the tax rules that determine how much retirees ultimately keep.
A higher state pension may provide additional income, but if the tax threshold does not move alongside it, some pensioners can find that part of the increase becomes taxable.
For those receiving only the state pension, the proposed exemption is intended to prevent that outcome.
For pensioners with private income, however, the picture could be more complicated.
The wider debate over the triple lock is also politically sensitive because older voters often depend heavily on the state pension and have limited opportunities to increase their income through work.
Any changes that appear to weaken retirement security risk generating a strong reaction.
An administrative headache for the Government
There are also practical questions about how the proposed system would operate.
HM Revenue and Customs would need to determine which pensioners qualify for the special allowance and establish how their income should be assessed.
If eligibility depends on receiving only the state pension, officials may need to distinguish between people who receive private pensions, occupational pensions, taxable savings income or earnings from part-time work.
Some retirees may have small or irregular amounts of additional income. Others may not realise that a modest payment could affect their eligibility.
Clear rules and communication would be essential to prevent confusion and unexpected bills.
Pensions specialists have warned that the system could become increasingly complicated and expensive if the difference between the ordinary personal allowance and the state pension continues to grow. <Cite refs={[“turn644793search0″,”turn644793news10”]}/>
There is also the question of whether older pensioners receiving different state pension arrangements would receive equivalent protection.
A policy that produces different tax outcomes for people with comparable total incomes could be difficult to explain and harder to defend politically.
The Government must therefore consider not only the immediate tax saving but also the long-term consequences of creating a separate allowance for one category of pensioner.
What the Government says it is trying to achieve
The proposed protection is not intended, according to the Government’s stated commitment, to punish people who have saved privately.
Its immediate purpose is to prevent pensioners whose sole income is the state pension from being dragged into income tax as a result of the planned increase.
Ministers can argue that people with additional private pension income have more resources than those relying entirely on the state pension.
But that argument does not automatically resolve the fairness question.
A small private pension may make only a limited difference to someone’s living standards, particularly after decades of inflation and rising household costs.
Meanwhile, pensioners with no private income may be eligible for other forms of support depending on their circumstances.
A more carefully designed policy could seek to protect low-income retirees without creating such a sharp distinction based solely on whether they receive a small additional pension.
For example, the Government could examine eligibility based on total income or consider transitional arrangements. Each alternative would have financial and administrative implications, and extending protection more widely would increase the cost.
The important point is that the reported plan is not yet the same as a fully implemented policy. The final eligibility criteria and practical arrangements will determine who benefits and who remains exposed to tax.
Pensioners want fairness, not complicated promises
For many older people, retirement is supposed to be the stage of life when decades of work finally provide some stability.
They may not expect luxury, but they do expect the rules to be understandable and consistent.
A pensioner who saved carefully may feel betrayed if a small private pension leads to a tax disadvantage that does not apply to someone with the same state pension but no additional income.
That frustration could be especially strong among people who spent years making contributions precisely because they wanted to avoid depending entirely on the Government.
The challenge for Healey is to demonstrate that the proposed protection will not create unnecessary divisions among pensioners.
That means publishing clear rules, explaining the treatment of private pensions and ensuring that people understand how their overall income will be taxed.
It also means acknowledging that retirement circumstances vary. Some pensioners have substantial private income, but others have only a small supplementary payment accumulated through years of ordinary employment.
Treating all additional pension income as evidence that someone can comfortably absorb a tax bill would overlook those differences.
A test of trust ahead of the Budget
Healey is expected to address the issue in the Budget scheduled for October 28, 2026. Until the detailed measures are confirmed, pensioners should not assume that every reported eligibility condition is final.
Nevertheless, the controversy already highlights a difficult political problem for the Government.
Protecting people who depend entirely on the state pension is a reasonable objective. But the method used to deliver that protection could leave other retirees feeling that their efforts to save have been overlooked.
The financial amounts involved may initially appear small, yet the principle matters enormously. People want to know that planning for their future will not leave them unexpectedly disadvantaged.
If the final scheme creates a sharp dividing line between pensioners with no private income and those with even a modest amount, the Government will need to explain why that distinction is fair and how it intends to avoid discouraging saving.
For pensioners who spent their working lives trying to do the responsible thing, the message must be clear: building a little financial security should not become a reason to face an avoidable tax penalty.
The Government has an opportunity to protect those on low incomes while designing a system that treats retirees consistently. Whether it can achieve both aims will be one of the most closely watched questions in the coming Budget.