The tax treatment of state pensioners

The majority of UK pensioners will miss out on the Government’s income tax exemption from 2027, according to new analysis by LCP. 

In April 2027, the Government expects the new state pension rate - currently £12,548 per year - to exceed the income tax threshold, which is £12,570 and frozen until 2030. As a result, someone reliant on the new state pension would begin receiving an annual tax bill from HMRC, estimated at around £88 in 2027/28, rising to £153 in 2028/29 and £220 in 2029/30.

In the 2025 Budget, it was announced that, from 2027/28, pensioners solely dependent on the new state pension (or the old basic pension) would not be charged income tax, even if their income exceeds the threshold.

However, new LCP research suggests that, of the 13.2 million people currently receiving a state pension, fewer than 1 million will be covered by this policy.

LCP identified issues including differential treatment of old and new state pensioners, a ‘cliff edge’ for those with £1 of additional income, and interaction with automatic enrolment.

LCP has explored two ‘cleaner’ solutions:

• An across-the-board increase in the tax allowance for all pensioners: if set so that the threshold exceeded the new state pension rate, this political issue could be addressed. However, this would come at considerable cost and would also benefit the over 8 million pensioners already paying tax.
• A write-off of small tax bills for pensioners: given that those solely dependent on the new state pension would face relatively small tax bills, it would be a cost-effective solution to write these off. This would target those most affected, avoid benefiting better-off pensioners, remove differences between old and new systems, and reduce the ‘cliff edge’ risk where £1 of extra income removes the concession.

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