The government’s proposed income tax waiver for low‑income retirees will exclude anyone whose pension includes a deferral increase, according to a recent industry analysis.
How the waiver is defined
The Treasury says the exemption applies only when the only income is the full new or basic pension without any added increments. The full‑rate pension is slated to rise above £13,000 next spring, pushing it past the £12,570 basic‑rate threshold that stays frozen until 2031.
Under current law, each year of deferral adds 5.8 % to the pension, or 10.4 % for those who reached pension age before April 2016. Those who defer automatically receive a higher weekly amount, but the upcoming waiver would not recognise that extra cash.
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A study by LCP earlier this year estimated that only about 1 in 18 retirees would qualify for the tax break. The same research suggests a wholly pension‑dependent retiree would save roughly £88 in 2027‑28, rising to £220 by 2029‑30.
Impact on those who delayed claiming
Former Pensions Minister Steve Webb, now a partner at LCP, warned that the lack of clarity makes it hard for people to decide whether to defer. “The uncertainty about the proposed ‘tax waiver’ on state pensions makes it difficult for people deciding now whether or not to defer taking their state pension,” he said.
One reader, who deferred in 2020‑21, says his weekly pension is now £252.78, about £11.48 higher because of the deferral increment. He fears he will lose the exemption and end up paying tax on the full amount above the threshold.
People who automatically defer by not claiming on time face the same risk. The extra increment is treated as taxable income, even though the base pension itself would be tax‑free under the new rule.
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Those with any private or occupational pensions, or who earned a significant State Earnings‑Related Pension Scheme (SERPS) credit, are already liable for tax and will not benefit from the waiver either.
In practice, a retiree with just £1 of other taxable income could be denied a waiver worth a few hundred pounds annually. Similarly, claimants receiving the old pre‑2016 pension plus SERPS will not qualify because SERPS counts as an increment.
Meanwhile, the government has not released detailed guidance on how the waiver will be administered, leaving many older adults uncertain about their tax position in the coming years.
