The Chancellor has clumsily reopened one of the most bitter state pension fault lines.
Rachel Reeves’s meddling with the state pension is only making things worse (Image: Getty)
Many older pensioners already receive a far lower pension than newer retirees. Now Reeves is lining them up to pay relatively more tax as well. It’s the direct result of a frozen tax threshold and a clumsy political workaround that creates a two-tier system among pensioners. And those on the basic state pension won’t be happy.
I wrote about this over Christmas, and it struck such a chord that I’ve decided to return the subject. Also, it’s complicated. At the heart of the mess is the frozen personal allowance. The income tax threshold has been stuck at £12,570 since 2021. Thanks to Reeves, it will now remain frozen until at least 2030/31.
The freeze was originally introduced by the Conservatives and hit tens of millions of workers, pushing money into higher tax brackets, where they will hand over even more of their hard-earned money to HMRC via fiscal drag.
Many of these will be pensioners, some of whom never expected to pay income tax at all in retirement.
Now comes the crunch. Thanks to the triple lock, the full new state pension is on course to rise above the personal allowance from April 2027. The only question is by how much.
That would mean pensioners living solely on the state pension becoming income taxpayers overnight, a practical nightmare for them and a logistical headache for HMRC. Many face a shock income tax bill.
Reeves claims to have a “simple” solution. Pensioners whose only income is the state pension won’t pay income tax on it during this Parliament, even if it creeps above the allowance.
That sounds reassuring. The problem is that isn’t one state pension. There are two.
Those who reached state pension age from April 6, 2016 receive the new state pension, a flat-rate payment based on National Insurance contributions. From next April it will be worth up to £12,548 a year, rising to around £12,862 in 2027/28.
That’s £292 above the personal allowance.
Under Reeves’s plan, these pensioners will be excused the tax bill, around £58 at first, but rising year by year after that. They are protected to the end of this Parliament.
It’s a different story for older pensioners, who retired before April 6, 2016, and receive the old basic state pension instead of the new one.
From April, it will pay a maximum of just £9,615 a year. Dramatically lower, and a long-standing source of anger .
On its own, the basic pension sits below the tax threshold. However, millions of older pensioners receive extra income through Serps or the state second pension.
Here’s the catch. Those additional payments count as taxable income today, and will continue to do so under Reeves’s plan.
If an older pensioner’s total income from state pension and additions exceeds £12,570, they will pay tax on it. Reeves’s workaround does nothing for them.
So we end up with a glaring injustice.
A pensioner on the higher new state pension pays no income tax. An older pensioner on a lower basic pension, topped up by Serps or S2P, may pay tax.
Reeves calls this a “simple workaround”.
In reality, it entrenches inequality, adds complexity, and leaves millions of older pensioners feeling abandoned once again.
Reeves could have avoided this by raising the personal allowance in line with the new state pension, or exempting additional state pension from tax. Instead, she created a two-tier botch job, and made a bonfire of state pension fairness.
