People deriving income solely from state pension won’t be taxed, says chancellor | Tax

Chancellor Rachel Reeves has said people who rely solely on their state pension for their income will not have to pay tax, opening up the prospect of a two-tier system for those in retirement.

The new state pension will rise to £241.30 a week next April, taking someone on the standard payment to £12,547 a year; This is just under the annual personal tax allowance of £12,570.

Freezing 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 “relieve the administrative burden on retirees whose only income is the basic or new state pension”; this commitment would only apply to those who did not receive a second state pension or any other increase.

“If the new or basic state pension exceeds the personal allowance from this point, they will not have to pay small amounts of tax through simple assessment from 2027-28,” he said.

While this may seem like a commitment to reducing retirees’ paperwork, Interview with Martin Lewis, Reeves went further, saying some retirees won’t face any tax bills.

After stating that the government “will not be chasing small sums of money”, when asked whether they would have to pay taxes, he replied: “They will not have to pay taxes in this parliament.”

This was confirmed by the Treasury spokesman.

Steve Webb, the former pensions minister and now partner at consultancy LCP, said the idea of ​​not charging income tax to a group of pensioners “raises a number of fairness questions”.

He said 2.5 million retirees on old state pensions already pay tax on their wages and questioned how they would be treated in a new system.

“The government has a clear delivery problem when the new state pension goes above the tax threshold in 2027. But millions of pensioners are already receiving state pensions above the tax threshold and nothing has been done for them so far. So there is a real risk that pensioners in the new system will not be treated better.”

He said the new scheme would risk penalizing people with small private pensions who were not protected from tax, compared with those who did not have private pensions and would be protected.

“This penalizes 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 at all, while a worker on exactly the same income will pay both tax and national insurance contributions, which seems unfair.”

Webb suggested there was no costing for the policy in the budget documents and that it may still be in the idea stage. The main document says: “The government is investigating the best way to achieve this and will announce further details next year.”

Webb said: “It will be incredibly difficult for the Treasury to come up with something workable and fair.”