People who rely only on their state pension for their income will not have to pay tax on it, the chancellor, Rachel Reeves, has said, creating the prospect of a two-tier system for those in retirement.
The new state pension is poised to rise to £241.30 a week next April, putting the annual income for someone receiving the standard payment at £12,547 – just below the personal tax allowance of £12,570 a year.
The freezing of tax thresholds means that if the state pension rises by just 2.5%, from April 2027 it will fall above the threshold and someone receiving it will face paying tax on £292 of their payments – a bill of £58.
Wednesday’s budget document included a commitment to “ease the administrative burden for pensioners whose sole income is the basic or new state pension”, which would apply only to those who did not receive the second state pension or any other uplifts.
It said they would not have to “pay small amounts of tax via simple assessment from 2027-28 if the new or basic state pension exceeds the personal allowance from that point”.
While that appeared to be a commitment to reducing paperwork for retirees, in an interview with Martin Lewis, Reeves went further, saying that some pensioners would not face a tax bill at all.
After stating that the government would not be “going after tiny amounts of money” she was asked if they would have to pay the tax and replied: “In this parliament, they won’t have to pay the tax.”
This was confirmed by a spokesperson for the Treasury.
Steve Webb, a former pensions minister and now a partner at the consultancy LCP, said the idea of not levying income tax on one set of retirees “raises several questions of fairness”.
He said 2.5 million pensioners on the old state pension were already paying tax on what they received and questioned how they would be treated under any new system.
“The government has a clear presentation problem when the new state pension goes above the tax threshold in 2027. But millions of pensioners already get state pensions above the tax threshold and nothing has so far been done for them. So there is a real risk that pensioners on the new system will be more favourably treated.”
He said the new scheme would risk penalising people with small private pensions who would not be protected from tax compared with those who have no private pension who will be protected.
“This penalises those who have saved, even modest amounts. And the new rules will mean that a pensioner just above the tax threshold will pay no tax whilst an employee on exactly the same income will pay both tax and national insurance contributions which seems unfair.”
Webb added that there was no costing for the policy in the budget documents, suggesting this may still be at the ideas stage. The main document states: “The government is exploring the best way to achieve this and will set out more detail next year.”
Webb said: “It will be incredibly difficult for the Treasury to come up with something that is workable and fair.”
