Labour scraps Rachel Reeves DWP state pension tax exemption rules in bombshell U-turn

Labour has scrapped most of Rachel Reeves’ DWP state pension tax exemption rules in a bombshell u-turn.

All year since the 2025 Budget, the Treasury has been confirming that state pensioners ‘with no other income’ apart from the DWP state pension will be exempt from paying tax on it, even if it breaks the £12,570 personal allowance tax threshold. It also said that state pension ‘increments’ such as the Additional Pension (AP) and Second State Pension or SERPs schemes would not be eligible for the exemption.

However, many of the rules ex-Chancellor Reeves planned to put in place have now been abolished with less than six months to go. Instead, they have been replaced with a new system which will allow all state pensioners, both old pre-2016 and new, post-2016 state pensioners, to collect a tax-free allowance up to the value of the full, new state pension. The full new state pension will now be £13,0346.40, and this will be the new tax threshold for all state pensioners with any type of income, including from work, savings, Additional Pension, or property income.

Then, those exceeding the threshold will see their tax-free allowance tapered off, with the tax exemption turned into a tax reduction up to a threshold of £13,319.

The Treasury published new guidance which explains how it works: “From April 2027, if your total income is no more than the full annual value of the new State Pension, you will receive the full Pension Tax Allowance and will not be brought into paying tax because of State Pension uprating in this Parliament.

“This applies regardless of where your income comes from, whether that is the State Pension, a private pension, earnings from work, self-employment income, savings, property or dividend income, or a combination of these.

“If your total income is slightly higher than the full annual value of the new State Pension, you may still receive an income tax reduction and pay less income tax than you otherwise would. The value of your Pension Tax Allowance will gradually reduce as your income increases until it is fully withdrawn. For every £3 of income above the full level of the new State Pension, your Pension Tax Allowance will reduce by £1.

“You will not need to contact HMRC or make a claim for the Pension Tax Allowance. HMRC will use information it holds on your State Pension age and income to apply the Pension Tax Allowance automatically when calculating your income tax.

“From the tax year beginning 6 April 2027, the full annual value of the new State Pension will increase to £13,036.40:

• If your total income is below the Personal Allowance (£12,570) you are not liable for any tax.
• If your total income is between £12,570 and £13,037, you will receive the full Pension Tax Allowance (worth up to £94).
• If your total income is between £13,037 and £13,319, you will receive some Pension Tax Allowance and pay less income tax than you otherwise would.
• If your total income is £13,319 or more, you will not receive any Pension Tax Allowance.

• For tax years 2028-29 and 2029-30, the value of the Pension Tax Allowance will be uprated in line with the full annual value of the new State Pension.”