The Labour government, led by Andy Burnham and John Healey, is set to impose income tax on state pensioners who receive 'protected payments' earned under the pre-2016 state pension system, according to a warning from former pensions minister Steve Webb. While the government has vowed to shield pensioners who rely solely on the state pension from HM Revenue and Customs (HMRC) income tax bills, those with protected payments or insufficient state pension to reach the tax threshold remain in scope.
Government's Promise to Shield Sole State Pensioners
Chancellor Rachel Reeves previously assured that pensioners whose sole source of income is the State Pension would not be forced to pay income tax on the small amount that falls above the personal tax allowance. This pledge applies to both the new and old (basic) State Pension, which will rise in line with average wage growth between May and July, standing at 4.8%. This uplift, confirmed by Ms Reeves, will benefit around 13 million pensioners next April, with the increase exceeding inflation.
The rise is guaranteed under the 'triple lock' mechanism, which ensures the State Pension increases annually by the highest of September's Consumer Prices Index (CPI) figure (3.8%), average earnings growth between May and July, or 2.5%. However, this uplift brings the State Pension very close to the current tax-free personal allowance of £12,570 a year, the amount earnable each year before paying tax.
Fairness Concerns Raised by Steve Webb
Steve Webb, a former Liberal Democrats pensions minister and now a partner at consultancy LCP, said the idea of not levying income tax on one set of retirees “raises several questions of fairness”. He highlighted that 2.5 million pensioners on the old state pension are already paying tax on what they receive, 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,” Webb said. “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.”
Protected Payments and the Impact on Claimants
Protected payments are additional amounts earned under the pre-2016 state pension system, which are subject to HMRC tax. Claimants who receive these payments, or who receive too little state pension to reach the income tax threshold, are at risk of being in scope for income tax. This creates a disparity between new state pensioners with no other income, who are shielded, and those with protected payments or lower pensions, who may face tax bills.
The government's approach has sparked concerns about fairness, particularly as the state pension approaches the tax threshold. With the new state pension expected to exceed the threshold by 2027, the issue is likely to intensify. For now, pensioners on the old system, including those with protected payments, remain liable for income tax on their pensions, while sole state pensioners are protected.
