Chancellor Rachel Reeves has announced a plan that could allow around one million state pensioners to avoid paying income tax, a move immediately branded as "unfair and unworkable" by a former pensions minister.
The Chancellor's Tax-Free Pledge
During an appearance on Martin Lewis's ITV show, the Labour Chancellor confirmed that a million people whose sole income is the state pension will not have to pay income tax on it. This is a direct result of the ongoing freeze on tax thresholds, which has not kept pace with rising pension values.
Ms Reeves also confirmed that approximately 13 million pensioners will receive an above-inflation increase to their State Pension next April. This uplift, governed by the 'triple lock', will see both the new and basic State Pension rise by 4.8%, in line with average wage growth recorded between May and July.
A 'Deeply Unfair' Divide for 2.5 Million
The proposal has drawn sharp criticism from Steve Webb, the former Liberal Democrat Pensions Minister. He highlighted a glaring inequality: around 2.5 million pensioners on the old state pension system are already paying income tax on their benefit, and the new plan does nothing for them.
"There are currently around 2.5m pensioners on the old system whose state pension on its own is already over the tax threshold. Why has nothing been done for them so far?" Webb stated. "There is a real risk that pensioners on the new system will be more favourably treated."
Webb pointed out that the policy lacks a formal costing in the Budget documents, suggesting it remains "an idea rather than a firm plan". He warned that devising a scheme that is both practical and equitable would be "incredibly difficult for the Treasury".
Understanding the Two-Tier Pension System
The controversy stems from the UK's two-tier state pension system:
- The Old State Pension: For those who reached state pension age before 6 April 2016. It comprises a basic pension of £176.45 per week, with the potential for an additional state pension topping up to £222.10 weekly.
- The New State Pension: For those who reached state pension age on or after 6 April 2016, with a single-tier amount.
The freeze in the personal tax allowance, while pension values rise via the triple lock, is pulling more retirees into the tax net. The Chancellor's intervention aims to shield the poorest pensioners, but as the row demonstrates, it risks creating fresh inequities between pensioner groups.
