The Chancellor has confirmed that many pensioners will not have to pay income tax – but experts warn the Government doesn’t know how to make the policy work
The government is working on a solution so that people earning only the state pension will not have to pay tax in the future, the Chancellor has confirmed.
Rachel Reeves told consumer champion Martin Lewis that those only taking home the new state pension – with no other kind of private pension income – will not have to pay tax during this parliament.
She said: “If you just have a state pension, and you don’t have any other type of pension, we are not going to make you fill in a tax return, and I make that commitment for this parliament.
“We are working on a solution as we speak to ensure that we’re not going after tiny amounts of money,” she added. “In this parliament, they won’t have to pay tax.”
She said that she could not make any commitments on plans beyond the term of this parliament, which runs until the next election in 2029.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “The Chancellor said the government are working on a solution that means people aren’t being chased for tiny amounts of money.
“It’s news that will be welcomed by pensioners who are seeing their state pension move to within a whisker of this threshold from April and were worried about what the future might hold for them.
“However, it is only a temporary reprieve, with the Chancellor refusing to be drawn on whether the change will remain long term. We can expect to find out more about longer-term options next year.”
It comes after figures suggest that the state pension will surpass the personal allowance threshold from 2027.
The government has confirmed that the state pension will rise by 4.8 per cent next year, taking the annual amount to £12,547.
The personal allowance – the amount you can earn before you have to pay any income tax – will remain frozen at £12,570 until 2031, meaning that by 2027 it is expected that the state pension will be higher than this amount.
Fears have been circulating for months that state pensioners will have to pay income tax on just their state pension income for the first time as a result, but the chancellor has said this will not be the case.
Figures from consultancy LCP found that at least half a million more pensioners will be dragged into paying income tax as a result of extending the freeze on tax thresholds to 2030 – and this was extended even further in the Budget, to 2031.
Problems with exempting just the new state pension
However, experts have warned that there are myriad problems that the government will need to overcome before it will be able to push ahead with a solution.
One policy expert involved in discussions about the idea told The i Paper that officials have ‘no clue’ how to make the policy work at the moment.
For example, the Chancellor appears to have been referring to people who claim the new state pension – the system for pensioners who reached state pension age on or after April 6, 2016.
However, there are already millions of people who claim the ‘old’ state pension and get additional income who pay tax on their state pension income only.
Steve Webb, partner at consultancy LCP, explained: “If they do a fix for the new state pension, they’ll have to do an equivalent for people earning the exact same amount under the old state pension system.”
It is understood that the government will exempt people on both ‘basic’ and ‘new’ state pension, but not people who already pay tax because they earn extra state pension income through the State Earnings-Related Pension Scheme (SERPS).
Webb added: “There’s also the issue of cliff edges. At what point do they cut it off? For example, if you earn 5p of private pension income, do they tax you on 5p, or make you pay tax on the whole lot, thereby creating unfairness?”
He added that another complication could be people earning the same amount of income through work having to start paying tax while state pensioners are exempt.
He said the government also does not know what this would cost, as it would vary depending on how much the state pension rises under the triple lock – where it rises by the highest of average earnings, inflation or 2.5 per cent.
“There has been no money set aside in the red book for this and it’s not currently scored [by the Office for Budget Responsibility], so the government will have to find the money for this,” he added.
A Treasury spokesperson said: “As the Chancellor has said, over this parliament those whose only income is the basic or new state pension without any increments will not have to pay income tax.”
