The Labour government's proposal to exempt older people from income tax when their sole income is the state pension will benefit only one in 18 pensioners, according to a new report. Andy Burnham and Chancellor John Healey have been warned that the policy will still leave the vast majority of state pensioners with private pensions or investments facing tax bills from next year.
Out of the 5 million people receiving the new state pension, four out of five will be ineligible for the tax waiver, mainly because they have additional income from private pensions or investments. The report highlights that the planned change will have a narrow impact, contrary to the government's stated aim of preventing pensioners from paying small amounts of tax.
Government's Budget promise and the growing tax threshold problem
In the last Budget, the government announced its intention to stop pensioners from paying tax when the headline state pension rate overtakes the personal allowance from 2027/28. Currently, the annual full rate of the new state pension for those retiring since 2016 stands at £12,548. This figure is just below the income tax threshold of £12,570, which is frozen until at least 2030/31.
If the government maintains its triple lock commitment—raising the state pension by at least 2.5% annually—the pension will exceed the basic rate tax threshold starting next spring. This collision between the triple lock uprating and the frozen tax thresholds is set to create a significant number of new taxpayers among pensioners.
Expert criticism: 'Deeply flawed' solution creates cliff edges
Former Liberal Democrats Pensions Minister Sir Steve Webb criticised the proposal, saying: "Two separate policies – triple lock uprating of the state pension and freezing of tax thresholds – will collide next year. From 2027 onwards, someone with just the new state pension and no other income will start getting annual tax bills from HMRC. This is politically embarrassing for the Government, but the proposed solution is deeply flawed."
Webb added that the policy discriminates against those on the old state pension system, even if they have identical income to someone on the new system, and creates unwelcome 'cliff edges' for those who have even a pound of other income.
Impact on pensioners and the wider tax system
The report's findings mean that the vast majority of new state pension recipients—around 4 million people—will still be subject to income tax on their state pension, despite the government's pledge. The proposed exemption would only apply to a small minority, leaving many pensioners with private pensions or investments facing tax bills.
The policy's narrow scope has raised concerns about its effectiveness in addressing the tax burden on pensioners. As the state pension continues to rise with the triple lock, more pensioners will be drawn into paying tax, unless the government revisits its approach. The report suggests that the current plan may not achieve its intended goal of avoiding small tax bills for pensioners, and the issue is expected to remain a point of political contention.
