Calls made to increase pensioner threshold amid £500 tax fears

Chancellor Rachel Reeves has announced that millions of pensioners will see their weekly State Pension payments rise by 4.1% next year, thanks to the earnings growth measure of the Triple Lock policy. She also revealed that the Personal Allowance will remain frozen at £12,570 until 2028.

Currently, around 64% of older people, or 8.1 million individuals, pay tax in retirement, largely due to additional income from workplace or private pensions on top of their State Pension. Despite the freeze ending in 2028, someone on the full New State Pension over the 2025/26 financial year will receive £11,975.60, leaving just £595 - roughly £50 per month - before the £12,570 personal tax allowance threshold is exceeded.

Following the Budget announcement, Lee Anderson (Reform UK) asked the Chancellor in a written question if she would consider introducing a higher tax threshold specifically for people over State Pension age. In response, Treasury Minister James Murray stated on November 1: "The Government is committed to making sure older people can live with the dignity and respect they deserve in retirement. The income tax Personal Allowance will continue to exceed the basic and full new State Pension in 2024-25."

He added: "This means that pensioners whose sole income is the full New State Pension or Basic State Pension without any increments will continue to not pay any income tax."

Retirement experts at Spencer Churchill estimate that approximately 900,000 more individuals will surpass the Personal Allowance threshold of £12,570 during the current financial year (2024/25). The full New State Pension is set to increase from £221.20 to £230.30 per week, which equates to £921.20 every four weeks, reports the Daily Record.

This means that annual payments will rise from £11,502 to £11,975.60 over the 2025/26 financial year. Similarly, those on the full Basic State Pension will see their weekly payments increase from £169.50 to £176.45, or £705.80 every four-week payment period.

This will result in annual payments rising to £9,175.40 over the 2025/26 financial year. It's crucial to note that additional State Pension elements, including deferred State Pensions, will increase by the September CPI figure of 1.7 per cent.

The Treasury Minister has also confirmed that older people whose only income is the State Pension will not be taxed. Those with additional income who do not pay HM Revenue and Customs (HMRC) directly through earnings or pensions, will not receive a tax bill until June or July 2025, which must be paid by the end of January 2026.

The current full New State Pension is valued at £11,502 this year. This leaves a mere £1,068 before the personal tax threshold is breached.

Therefore, anyone with an additional income of £89 or more per month - on top of their State Pension - could face a tax bill next year. When the annual sum increases to £11,975.60 next year, this leaves just £595 - roughly £50 per month - before the £12,570 personal allowance is exceeded.

Someone receiving the full rate of the Basic State Pension currently gets £8,814, leaving just £3,756 before the personal tax threshold is reached, equivalent to an additional income totalling £313 per month. Over the 2025/26 financial year, this will rise to £9,175, leaving £3,395 before the personal tax allowance has been used - an extra £283 each month.