Income earned through employment is taxable. In general, benefits that are designed to replace income are taxable, and the same applies to income from the State Pension. Income Tax is due on an individual’s total income above the Personal Allowance (PA), currently £12,570. Total income could include: the State Pension (the basic State Pension, the new State Pension, and the Additional State Pension); other taxable benefits; a private pension (workplace or personal); any other income, such as money from investments, property, or savings.
It is important to note that the PA is currently set at a level high enough to ensure that those pensioners whose sole income is the new State Pension or basic State Pension do not pay any Income Tax. The Government has nearly doubled the PA since 2010, meaning around 30 per cent of individuals do not pay any tax. The PA is high by international standards – it is one of the most generous personal tax allowances in the OECD and the highest in the G7.
Removing income tax from the State Pension would add complexity to the tax system, and those paying higher rates of tax would receive the greatest benefit. Lower-earning individuals with income below the higher rate threshold would benefit less, and those earning below the PA would not benefit at all.
The Government remains committed to ensuring that older people are able to live with the dignity and respect they deserve, and I therefore welcome that the Chancellor increased the State Pension by 10.1 per cent in April 2023 – the biggest-ever cash increase in the State Pension. Support available beyond the State Pension includes Winter Fuel Payments and free eye tests, NHS prescriptions and bus passes. Some may also qualify for means-tested benefits including Pension Credit and Housing Benefit.
The Government keeps all aspects of the tax system under review, and any decisions on future changes will be taken by the Chancellor in the context of the wider public finances.