People relying solely on the state pension will not pay income tax

Income tax will be scrapped for people whose sole income is the state pension, the Treasury has confirmed. 

The state pension is set to exceed the tax-free personal allowance from 2027, but if this is your only source of income you won't need to pay any tax on it.

Here, we explain what's changing and share three ways pensioners can cut their tax bills. 

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What's changing?

If you were listening carefully to Chancellor Rachel Reeves' Budget speech you would have heard her briefly mention plans to scrap 'simple assessments' for pensioners whose only income is the new or basic state pension.

However, in a follow-up television interview with money campaigner Martin Lewis, Reeves went further and stated that income tax will be scrapped entirely for these pensioners for the rest of this parliament.

From April 2026, the full state pension will be worth £12,547.60 - just under the personal allowance of £12,570 (the amount you can earn each year before you start paying tax).

But from 2027, even if the state pension only rises by the minimum 2.5%, it will exceed the personal allowance for the first time. This would have resulted in some pensioners facing a tax bill, even if they had no other sources of income. 

The Treasury told Which?: 'As the Chancellor has said, over this parliament those whose only income is the basic or new state pension without any increments will not have to pay income tax.'

The spokesperson added that the government will set out more details about how this will be implemented at some point next year. 

How do pensioners pay tax?

Where tax is due, HMRC will continue to send simple assessments to eligible pensioners instead of asking them to complete a full tax return. 

Unlike self-assessment, the tax bill is calculated based on details about income supplied by banks and building societies or state pension earnings automatically sent to HMRC by the Department for Work and Pensions. 

HMRC's website gives the following examples of when underpaid tax could trigger a simple assessment:

• Pensioners who receive income from state pensions, occupational pensions, employment pensions, and most taxable state benefits.
• Pensioners with up to £10,000 of untaxed income (for example, from savings or investments). 

What to do if you receive a tax bill

If you are expected to pay tax using a simple assessment, you will usually receive a letter between July and August after the end of the tax year. Although they can be sent at any time as information becomes available.

You’ll need to pay the bill by the deadline stated on the letter (usually 31 January or three months from the date of the letter).

Unexpected tax bills can be scary, especially if you are already struggling with your finances. Here are few simple steps to take if you get a letter:

• Check all the information on the simple assessment letter carefully, including personal details such as your address.
• Next, follow the instructions in the letter on how to pay your assessment. You can pay online, by using the HMRC app, via bank transfer or by cheque.
• If the information is incorrect or you have additional untaxed income, you’ll need to contact HMRC within 60 days.

Get help if you need it

If you're finding any part of the process difficult or need to ask a question about simple assessments, you can call HMRC on 0300 200 3310. The tax office also has a handy online guide to help.

If you're struggling to pay, you can also set up a payment plan online. To be eligible, you'll need to owe between £32 and £50,000, not have any other payment plans or debts with HMRC, and plan to pay your debt off within the next 36 months.

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3 ways pensioners can cut their tax bill

Whether you already pay income tax on your pension or are looking to pay less in future, there are ways to reduce your tax burden as a pensioner: 

1. Access pension cash gradually

You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. The most you can take in total is £268,275.

However, this can also be accessed incrementally, with 25% of each withdrawal taken tax free. This strategy can be useful in minimising the overall tax burden. 

What you don’t take out can be left invested in your pension, where it can grow tax free. 

• Find out more: should I take a lump sum from my pension?

2. Make the most of your tax-free allowances

Those on low incomes can access a special ‘starter rate’ for savings, which allows you to earn interest up to £5,000 without paying tax. Every £1 of other income (for example, your pension) above your personal allowance reduces your starting rate for savings by £1. 

Then there’s the personal savings allowance, which is worth £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Any interest you earn above that will be charged at your usual income tax rate (additional-rate taxpayers get taxed on all interest earned on savings outside an Isa).

• Find out more: tax on savings interest and investment income explained

3. Open an Isa

For those with larger savings pots, or additional-rate taxpayers, an Isa is a great way to shelter your savings interest or investment income from tax.

You can save up to £20,000 in Isa, split however you want between cash and stocks and shares. Any income generated can grow completely tax-free, protecting your savings now and in the future.

The cash Isa allowance will drop to £12,000 from April 2027, but that won't affect savers over 65 years old.

• Find out more: best Isa rates 2025