HMRC has confirmed a £1 "cliff edge" that could see pensioners lose their entire tax exemption, potentially resulting in significant tax bills for many retirees. The announcement follows November's Budget, where Labour Party Chancellor Rachel Reeves declared that retirees surviving solely on the state pension would not have to pay income tax. However, this move would benefit only 800,000 of Britain's 13.2 million state pensioners, excluding anyone who reached retirement age before April 6, 2016, according to consultancy LCP. No one receiving the "old" pre-2016 state pension will benefit from the exemption.
Financial Cliff Edge for Pensioners
LCP warns that someone living on the new state pension alone will face a financial cliff edge, where just £1 in additional earnings could cost them hundreds of pounds in tax. About 6 percent of pensioners would save £220 a year in tax by 2029-30, costing taxpayers more than £170 million annually. The policy could prove difficult for any government to reverse, similar to the Department for Work and Pensions (DWP) triple lock, experts fear.
Expert Reactions
Helen Morrissey of Hargreaves Lansdown commented: "This change will relieve the admin burden on some pensioners, who may have suddenly had to fill in a simple assessment form for the first time. However, it will be seen as hugely unfair by others who may have struggled to save into a small pension and now face paying tax. Every penny counts when you are on a lower income and they might find themselves looking at those on a similar income, who don't pay any tax, and asking 'what's the point in saving into a pension?'"
Sir Steve Webb from LCP added: "It may be reasonably easy to defend not collecting £88 in tax from relatively low-income pensioners in year one. But if this policy continued into the next Parliament, it would get more and more expensive with every passing year and be very hard to switch off, like the triple lock. As the years go by, the Government would be writing off hundreds of pounds per eligible pensioner, increasing the disparity between them and others struggling by on a modest income. This also comes at a growing cost to the taxpayer."
