Hundreds of thousands of low-income pensioners are set to pay an effective 53 per cent tax rate on part of their retirement income, under new rules introduced by John Healey in his maiden Budget.

The Chancellor confirmed he will shield low-income pensioners from income tax as the state pension is set to rise above the personal allowance threshold from April 2027.

The full state benefit will rise by £489 to £13,036, pushing those who rely solely on the benefit above the £12,570 threshold. Healey hiked the threshold to the new amount to ensure the UK’s poorest retirees do not pay income tax.

But for those who earn just above this income level, the tax rate will be reduced by £1 for every £3 of income above the threshold. The mechanism acts as a benefit taper, similar to the 60 per cent tax rate, as extra income causes the temporary relief to be wiped away.

For pensioners on £13,319 or above, the tax break will therefore be reduced to zero.

Buckling other low earners

While the policy protects those under the threshold, those who earn between that range will face an effective tax rate of 53 per cent, according to pensions consultant LCP.

The rate is made up of 20 per cent basic income tax rate, plus the loss of the tax break at 33 per cent.

Steve Webb, partner at LCP and former pensions minister, said retirees will find that each £100 of annual private pension built above the rate of the new state guarantee will add £53 to their income tax bill.

“The Chancellor has created a bizarre 53 per cent income tax rate for around 200,000 low income pensioners,” he said.

“We are used to seeing high rates of income tax like this for top earners but not for those on very modest incomes. Yet again, complexity has been introduced to the tax system to fix a short-term problem but with no long-term solution in mind.”

The wide gap

Advisers warned Healey not to introduce the policy, as the gap between the new state pension and frozen tax threshold will continue to widen over the course of this Parliament, making it harder to “switch off”.

The gap will grow by a minimum of 2.5 per cent annually, putting a further burden on the public purse. It is expected to cost taxpayers £200m a year by 2030.

In the 2027/28 tax year, the state guarantee is expected to rise to £250.70 per week, leaving it £466.40 above the threshold.

By the 2029/30 financial year the pension is anticipated to climb to £263.35 per week, equal to £13,694 per year, exceeding the allowance by £1,124.20.