Rachel Reeves just slapped pensioners round the face again – this time she’s gone too far
The Chancellor has got herself into yet another state pension mess.
Chancellor Rachel Reeves is in deep water over the state pension (Image: Getty Images)
I’ve already written twice about the chaos Rachel Reeves has created by freezing tax thresholds while letting the state pension rise under the triple lock. This will punish older pensioners. I concluded in my last piece that she’d dug a hole for herself. I’ve now realised that her hole is even deeper. And once again, it’s older pensioners who lose out.
The core problem is this. The personal allowance has been frozen at £12,570 for years and Reeves has now extended that all the way to 2031. Next year, April 2027, the new state pension will exceed the personal allowance, and will be instantly taxable for anybody who gets the full amount.
It means the DWP will pay the money, and HMRC will take instantly tax it.
To head off a looming administrative nightmare, Reeves announced a clumsy fix. Pensioners whose sole income is the new state pension won’t pay tax on it this Parliament, even after it rises above the allowance. That sounds fair until you look closer, which I have. Then it’s chaos.
There are two state pensions. The new state pension is a single-tier payment, made to those who retired from April 6, 2016. However, around eight million who retired before that date get the basic state pension, which may also be topped up by Serps or the state second pension. Under what Reeves laughably calls her “simple workaround”, this additional state pension will remain taxable.
So we now have a two-tier system where a chunk of the state pension older retirees receive is taxed, when it isn’t for more recent pensioners. That was bad enough. It gets worse. Every year, the new state pension rises under the triple lock. It goes up by earnings, inflation or 2.5%, whichever is highest. The basic state pension also benefits from the triple lock, so older pensioners feel some of the upside.
But additional state pension does not. Serps and S2P are uprated only in line with inflation, using the consumer price index figure from the previous September. There is no earnings link and no 2.5% floor. They don’t get the same guarantee.
It’s a weird anomaly that should have been fixed years ago. Instead, it’s been allowed to fester, to the detriment of older pensioners.
That hasn’t mattered much lately because inflation has been higher than both wages growth and 2.5%. But it matters now.
This April, both the new and basic state pensions will rise by 4.8%, in line with last year’s earnings growth. Additional state pension will rise just 3.8%, reflecting September’s inflation figure.
And now Reeves has layered another problem on top. Of course she has. Her tax bungle makes this imbalance even more damaging.
Inflation is expected to slide to around 2% this year. That’s below the triple lock floor of 2.5%. As a result, both the new and basic state pensions will rise by at least 2.5% in April 2027, and possibly more if earnings are higher.
Additional state pension will rise only with inflation, so potentially by just 2%. Maybe less.
This is the second hit for older pensioners, courtesy of the Chancellor. Not only do they face a smaller increase to their additional state pension, but every penny of it counts towards taxable income. Meanwhile, those on the new state pension alone get the full triple lock hike plus tax protection too.
This is insanely technical, but the result is simple. Older pensioners look set to get a smaller rise and potentially pay more tax on it.
The sheer complexity of our state pension system is absurd. Reeves has blundered in and made it worse by exempting one part of the state pension from tax while charging another. It’s a monstrosity.
The only saving grace for Reeves is that many older pensioners won’t understand what she’s done. Once they do, they’ll be seething.
