Budget 2026: Poorest pensioners shielded from income tax

Chancellor John Healey has announced that pensioners with low incomes will be shielded from income tax as their state pension is set to surpass the personal allowance threshold in the coming year. This decision, expected to incur a cost of approximately £200 million annually by 2030, aims to protect nearly one million pensioners who heavily rely on the state benefit.

The government has confirmed previous measures introduced by former Chancellor Rachel Reeves and will implement the "new Pension Tax Allowance" from April 2027.

The full state pension, which will rise by £489 to £13,036, will push those receiving only the benefit above the £12,570 personal allowance threshold. To prevent these individuals from paying nearly £500 in income tax, Healey has increased the tax-free allowance for this group to £13,036, which is anticipated to be frozen at this level throughout the Parliament. As the state pension continues to increase, the tax-free allowance will also rise in line with these changes.

According to pension consultant LCP, the solution has been criticized as "unfair" due to the widening gap between the new state pension and the frozen tax threshold. Steve Webb, a partner at LCP, highlighted that even with a 2.5% minimum increase in the threshold, the gap will continue to grow, making the policy more challenging to suspend.

The tax allowance will apply only to those with income matching or below the new state pension, which means some pensioners might lose their protection if they fall just above the threshold.