John Healey will shield low-income pensioners from income tax when he delivers his first Budget on Wednesday, closing a trap created by the triple lock and a personal allowance that has not moved for five years.
The full, flat-rate state pension is expected to rise by 3.9 per cent from April, to 13,036.40 pounds a year. That is about 489 pounds more than now, and it sits above the 12,570 pound threshold at which income tax begins. Without a change, people whose only income is the new state pension would owe basic-rate tax on the slice above the allowance, and would have to deal with HMRC to pay a small bill.
Ministers had already promised that would not happen. What arrives on Wednesday is the mechanism. Allies of the Chancellor say a new tax allowance for low-income pensioners will match the full state pension, so the promise is kept without a wider unfreezing of the personal allowance. The Budget is due to be printed this evening. Healey's speech is expected at lunchtime on Wednesday, and aides say the wording is still being settled.
Where the triple lock meets the tax threshold
The triple lock lifts the state pension each April by whichever is highest: earnings growth from May to July, inflation in the previous September, or 2.5 per cent. Official figures put total wage growth, including bonuses, at 3.9 per cent in the quarter to July. That is the figure that sets next year's rise. The full new state pension is currently about 12,548 pounds. From April it is expected to be worth about 250.70 pounds a week.
The Times and the Telegraph reported overnight that the new pensioner allowance will be set at 13,036 pounds and will keep pace with state pension increases for the rest of this parliament. They put the cost at about 200 million pounds a year by the end of the decade. The Treasury has not published a final headcount of who will benefit. Those reports suggest close to a million people would otherwise have been drawn into tax for the first time.
The protection is narrow by design. Pensioners with private or workplace pensions that take them over the threshold will still pay income tax in the usual way. The freeze in the personal allowance has already pulled millions into the tax net: 9.6 million pensioners pay some income tax this year, up from 7.1 million in 2022-23. Pensions minister Torsten Bell has said people who only just cross the line should not face a tax bill on the state pension alone. Wednesday is when the Chancellor has to show how.
The Pension Tax Change at a Glance
- The full new state pension is expected to rise 3.9 per cent, to 13,036.40 pounds a year, from April.
- The main personal allowance stays at 12,570 pounds.
- A new allowance for low-income pensioners is expected to match the state pension, and to rise with it for the rest of this parliament.
- Reports put the cost at about 200 million pounds a year by the end of the decade.
- The 268,275 pound cap on tax-free pension lump sums is expected to stay.
One raid that is not coming
The Telegraph also reported that Healey has dropped a plan to cut the tax-free lump sum savers can take from a pension, currently capped at 268,275 pounds. There had been talk of a cut to 100,000 pounds. Withdrawals have already jumped. The Financial Conduct Authority has said the amount taken from pots accessed for the first time rose from 52 billion pounds to 91 billion pounds over two years, a 75 per cent increase, as people moved money ahead of inheritance tax on pensions from April.
Leaving the lump sum alone will be read in the City as another sign that this Budget is meant to calm, not surprise. Bond investors have warned the Chancellor not to spend beyond what he raises, with the national debt above 3 trillion pounds and 30-year gilt yields at highs last seen in the late 1990s. Inflation is at a one-year high of 3.5 per cent.
Rivals publish their own Budgets
The Conservatives and Reform UK are using the run-up to set out alternative packages, both built around deep cuts to the welfare bill. The Tories want green levies, red tape and benefits reduced in the name of lower energy bills. Reform has recommended 60 policies it says would create jobs, including approval of the Rosebank oil field, a North Sea project Healey is understood to favour after the government cleared the Jackdaw field last week.
Liberal Democrat Treasury spokeswoman Daisy Cooper has urged a new growth and defence partnership with the European Union, including membership of the single market, which she said would ease the tax burden. Green leader Zack Polanski, with Green MPs and peers, has written to Healey asking him to "make the UK affordable", including by funding help with energy bills through the end of a tax relief for data centres.
For Andy Burnham, two days before the statement, the pension announcement is the part of the package he can talk about without moving the gilt market. The larger choices, on bank taxation, mayoral borrowing and how far to go on household bills, are set out in our business briefing on Wednesday's statement. If you want the row over the bank surcharge that still sits on the Chancellor's desk, read the City's warning to Healey.