The Labour government has confirmed that four groups of state pensioners will be excluded from Andy Burnham's HMRC income tax waiver, a move that could leave some retirees facing tax bills despite the policy's aim to simplify the system.
The waiver, announced in the Budget Red Book, is designed to ease the administrative burden for pensioners whose sole income is the basic or new State Pension without any increments, so that they do 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.
Who is excluded from the waiver?
Former Pensions Minister Steve Webb, a partner at LCP which conducted the research, outlined the four groups set to be disqualified. These include someone with just one pound of other taxable income, who could be disqualified for a waiver worth a few hundred pounds a year in a few years' time.
Also excluded are people on the old pre-2016 state pension plus Serps, receiving exactly the same as someone on the new state pension, who will not be exempt because Serps is an 'increment' to the basic pension. Those under state pension age who are on exactly the same income as someone over pension age who gets the waiver are also excluded, as are those with 'increments' such as for deferral of state pension.
Government commitment and financial impact
The full rate state pension is expected to top £13,000 from next spring, above the basic rate threshold of £12,570, which is frozen until 2031. The Treasury has vowed those whose sole income is the state pension will not pay income tax.
The Budget Red Book stated: "The Government will ease the administrative burden for pensioners whose sole income is the basic or new State Pension without any increments, so that they do 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."
Concerns over complexity and uncertainty
Mr Webb said: "The uncertainty about the proposed 'tax waiver' on state pensions makes it difficult for people deciding now whether or not to defer taking their state pension."
Alasdair Mayes, Partner and Head of Pensions Tax at LCP, added: "This is another example of a seemingly well-intentioned policy announcement adding complexity and unfairness in the tax system. A simple and transparent tax system would be a benefit to all."
An HM Treasury spokesperson said: "Anyone whose only income is the full new or basic state pension without any increments will not pay income tax and we are committed to that over this Parliament. By keeping the triple lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from the highest Personal Allowance in the G7."
The government is exploring the best way to achieve this and will set out more details next year.
