Thousands of pensioners who depend on the state pension are facing unexpected tax bills of approximately £800 from HM Revenue and Customs (HMRC), despite a new policy designed to protect those on the lowest incomes.
The 'Cliff-Edge' Policy Leaving Pensioners Behind
Following the Autumn Budget, Chancellor Rachel Reeves announced that from 2027, individuals whose sole income is the state pension would be exempt from income tax when it rises above the personal allowance. However, this pledge has created a stark divide, leaving a significant group of retirees like 71-year-old Alan Perkins facing substantial demands.
Mr Perkins, who has no private pension, relies on his Department for Work and Pensions (DWP) payments. He is one of many who paid into the State Earnings-Related Pension Scheme (SERPS), which provides an additional weekly income on top of the basic state pension.
A Real-Life Impact: Alan Perkins's Story
Due to his SERPS top-ups, Alan Perkins receives an extra £90 per week, bringing his total annual income to about £16,500. This places him £4,000 above the personal allowance, a threshold which has been frozen since 2021 under former Chancellor Rishi Sunak.
"I’ve worked like a dog for all of my life," Mr Perkins said. "I worked stupid amounts of overtime to provide for my family... And now I’m retired, they take tax out of it. I never thought anyone on a state pension would pay tax."
He expressed frustration at the new policy, stating: "When I saw Rachel Reeves announce that people only on the state pension would be exempt, I thought big deal, I’m already paying it. Does she not realise there are people like me?"
Experts Condemn 'Indefensible' Inequality
The policy has drawn sharp criticism for creating an unfair disparity between pensioners with nearly identical incomes. Sir Steve Webb, a former pensions minister, highlighted the inherent contradiction.
"The proposed policy favours one very specific group for no very obvious reason," Sir Steve told the Telegraph. "It’s perfectly possible to have two pensioners who live next door to each other with identical state pensions – one from the standard rate of the new state pension and one from the old basic pension plus Serps. As far as we can see, the first of these will be let off paying income tax but the second will not. In my view this is completely indefensible."
The situation underscores the long-term consequences of the frozen personal allowance, which has remained static since 2021, dragging more people into the tax net as their incomes slowly increase through mechanisms like SERPS. For retirees like Alan Perkins, the promise of future relief offers little comfort against the reality of a present-day £800 bill.
