LITRG: Chancellor urged to clarify details behind plan to free some pensioners from income tax

Ahead of an evidence session with the Treasury Select Committee this week¹, LITRG wants Rachel Reeves to set out how the proposal first described as an effort to “ease the administrative burden for pensioners whose sole income is the basic or new State Pension”², but subsequently confirmed as a plan to take this group of pensioners out of income tax altogether,³ will work. LITRG notes that these are two very different policy ambitions.

In a new blog, LITRG explains how a lack of clarity on the proposal raises questions about its scope and intent, while noting that a plan to remove the income tax burden from state pensioners with only basic or new State Pension income raises issues around fairness and risks introducing further complexity to the tax system.

This debate comes in response to reports that the value of the full new State Pension will exceed the tax-free personal allowance by April 2027, a situation that will tip some pensioners into income tax for the first time in retirement.

The LITRG blog can be read at www.litrg.org.uk/blog-post/state-pension-tax-debate-issues-arising-budget-2025-announcement.

Joanne Walker, LITRG Technical Officer, said:    

“What at first appeared to be an administrative initiative to make it easier for state pensioners to engage with the tax system has now been confirmed as a policy that takes some out of income tax altogether.

“While there is certainly a rationale for making it administratively easier for state pensioners to meet their tax obligations, exempting only certain state pensioners from tax – based purely on their income sources, rather than income levels – is likely to raise questions of fairness. Depending on how it is done, it also risks introducing further complexity to the tax system, making it harder to understand why some could still be subject to tax and others not, at the same levels of income.

“For example, it appears that the proposal will apply to pensioners with only basic or new State Pension income, without increments, but not to those who receive a smaller State Pension entitlement,4 but perhaps also have a small private pension that brings them up to a similar income level.

“Although the full new State Pension is not expected to exceed the personal allowance until April 2027, some pensioners already have State Pension income higher than the personal allowance, as a result of increments.5 In some cases, the State Pension can be as much as £20,000 a year. The suggestion appears to be that these people will not benefit from the proposed easement.”

Joanne Walker continued:

“Whilst this measure will reduce the tax burden on some pensioners and consequently mean they have more money for day to day costs, there is a danger here that the government inadvertently creates two classes of pensioners; those who will not be subject to tax purely because of the type of income they receive, and others on similar levels of income who will still be liable.

“The government should be extremely wary of anything which smacks of the arbitrary singling out of one group of people for different tax treatment without giving full thought to the potential complications and consequences.

“In the absence of clarity, it is hard to know what this policy will look like in practice and, as such, it raises far more questions than answers. We recommend the government provide detailed information, including costings and an impact assessment, as soon as possible. A consultation could further help assess how the proposal fits into the broader tax system and could be used to explore alternative – potentially fairer – solutions.”

Notes for editors

1. 10 December 2025 - Budget 2025 - Oral evidence.
2. Paragraph 4.167 of the Budget 2025 document states: State Pension and Simple Assessment – The government will ease the administrative burden for pensioners whose sole income is the basic or new State Pension without any increments so that they do not have to pay small amounts of tax via Simple Assessment from 2027-28 if the new or basic State Pension exceeds the Personal Allowance from that point. The government is exploring the best way to achieve this and will set out more detail next year.
3. For example, see: The Chancellor confirms those who only get State Pension WON'T pay income tax on it this Parliament (Moneysavingexpert.com, 28 November 2025).
4. Entitlement to full State Pension is dependent on the number of qualifying years a person has on their National Insurance record. Some people who have an incomplete National Insurance record may have a reduced State Pension entitlement.
5. This can occur for example where a person receives the basic State Pension, but also qualifies for the additional State Pension. This is also sometimes referred to as SERPS or second State Pension.