Research published today by pension specialists LCP reveals that Chancellor Rachel Reeves's plan to shield certain pensioners from income tax starting in 2027 will help a only small fraction of retirees.
According to the analysis, fewer than one million people stand to benefit from the exemption scheme announced in the Budget, representing roughly five per cent of the 13.2 million individuals currently drawing a state pension in Britain.
The policy was designed to prevent pensioners who rely solely on the new state pension from receiving tax demands once the full amount surpasses the frozen personal allowance threshold next year.
However, the LCP findings suggest the vast majority of British retirees will find themselves ineligible for this relief despite the Chancellor's promise to protect vulnerable pensioners.
The 'vast majority' of retirees could pay tax on their state pensions
| GETTYAll 7.7 million retirees receiving payments under the old state pension arrangement are automatically barred from the concession, as the basic pension rate of £9,614 annually falls far short of the £12,570 tax threshold.
Those on the old system who also receive additional state pension payments, approximately 6.5 million people, are similarly disqualified because they receive "increments" beyond the basic amount.
Among the 5 million pensioners on the new state pension, more than four in five remain ineligible for various reasons.
Around 290,000 live outside the UK, while roughly one million receive protected payments on top of their standard entitlement.
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Graph projects the number of retirees facing a stealth tax on their state pensions will rise in the coming years | Chat GPT A further 1.1 million have pension rates too low to breach the tax threshold within three years, and approximately 1.8 million possess other taxable income such as private pensions or investments.
The LCP report highlights several serious deficiencies in the proposed scheme. Pensioners on the old system with identical total income to those on the new system face starkly different treatment—the former must pay tax while the latter have their bills cancelled entirely.
The policy also creates punishing cliff edges for those with even trivial additional income. Someone with just £1 of extra earnings loses the entire exemption, meaning they must pay tax not only on that pound but also approximately £88 on their state pension in 2027/28, rising to £220 by 2029/30.
Cashing out a small pension pot could disqualify them from the concession, potentially costing hundreds of pounds in additional tax.
How the state pension triple lock has changed over the years | GB NEWS / FIDELITY INTERNATIONAL Steve Webb, a former pensions minister under the coalition Government and partner at LCP, described the approach as fundamentally problematic.
He said: "Two separate policies, triple lock uprating of the state pension and freezing of tax thresholds, will collide next year. This is politically embarrassing for the Government, but the proposed solution is deeply flawed.
"It discriminates against those on the old state pension system, even if they have the same income as someone on the new system, and creates unwelcome 'cliff edges' for those who have even a pound of other income. It is also clearly a temporary sticking plaster solution for a problem that will have to be addressed at some point."
Alasdair Mayes, Partner and Head of Pensions Tax at LCP, added: "This is another example of a seemingly well-intentioned policy announcement adding complexity and unfairness in the tax system."