Chancellor fobbed the elderly off with a promise, but not all is as it seems
Chancellor Rachel Reeves has put pensioners in a tax fix (Image: Getty)
The Chancellor thought she’d found a neat way out of a looming state pension tax headache. Not so.
Instead, she has worsened our two-tier state pension tax system. It’s confusing pensioners today and is set to cause even more anger next year. The problem stems from the frozen personal allowance. Income tax thresholds have been stuck at £12,570 since 2021 and in November Rachel Reeves froze them until at least 2030/31. As the state pension continues to rise under the triple lock, it’s set to bust through the personal allowance from April next year.
And when it does, retirees will become income taxpayers simply for receiving the full new state pension. It creates a ridiculous situation where the DWP will pay their pension, and HMRC will instantly take a slice of it back. And that slice will grow, year after the year, all the way until 2031.
To head this off, Reeves made a clear and breezy public promise. Pensioners whose only income comes from the state pension will not pay income tax on it during this Parliament, even if it rises above the personal allowance.
Basically she took the easy way out, and fobbed pensioners off with a promise, without working out whether that might be a few kinks along the way. And there certainly are.
The message was designed to reassure, and many pensioners took it at face value. But the reality is proving to be a lot more complex, and it’s already causing confusion among pensioners. It’s only going to get worse as more are trapped by the threshold freeze.
The promise only works for roughly a third of the UK’s 13million pensioners. There is not one state pension, but two. Around 4.5million who reached state pension age from April 6 2016 receive the new state pension, a flat-rate payment based on National Insurance contributions. If that’s their only income, Reeves’s pledge broadly holds.
Older pensioners are in a very different position. Roughly 8.5million who retired before April 6 2016 receive the older basic state pension, which is significantly lower.
Millions also receive additional payments through Serps or the state second pension (S2P). Those top-ups are taxable income and remain fully within the income tax system.
And that’s where pensioners have been misled. Reeves’s promise does not protect these older retirees. If their combined state pension income breaches £12,570, they will pay tax. Even if they get less than someone on the new state pension alone.
Reeves did not make this distinction clear. She still hasn’t. Maybe she wasn’t aware it was a problem at the time, but she should be today. She’s probably keeping her head down.
The complexity does not end there. Additional state pension like Serps and S2P does not rise under the full triple lock. While the basic and new state pensions increase by earnings, inflation or 2.5%, they rise only with inflation.
As inflation falls, older pensioners face the prospect smaller increases on part of their pension, which may also be taxable. Many basic state pensioners already feel hard done by, and this will make things worse.
Reeves promised a simple fix. What she delivered is a two-tier system that leaves older pensioners exposed and wondering where they stand. She’s got herself in yet another fine mess.
