Chancellor Rachel Reeves has ignited a political firestorm by confirming a three-year freeze on income tax thresholds, a move critics are branding a new 'two-tier' weapon against millions of workers and pensioners.
The Chancellor's Announcement and the 'Two-Tier' System
In a statement that has drawn fierce criticism, Chancellor Rachel Reeves confirmed that income tax thresholds will remain frozen for an additional three years. However, in a concurrent and controversial policy, she announced that individuals whose sole income is either the old or new state pension will not pay any income tax during this Parliament.
This specific exemption, later reiterated by the Chancellor on ITV News, has been attacked for creating a divisive 'two-tier' system for retirees. The policy effectively means pensioners with additional income from private or workplace pensions will face taxation, while those reliant solely on the state pension will not.
Outcry from Peers and Financial Experts
The announcement prompted immediate backlash, with warnings that it undermines the incentive to save for retirement. Conservative peer Lord Mackinlay, a former MP, condemned the move as another example of 'two-tier taxation' that punishes diligence.
"People will ask, what’s the point in saving into a pension? Why did I bother?" Lord Mackinlay stated. He proposed a fairer alternative: "The elegant solution would have been to give everyone in the country a personal [tax-free] allowance reflecting the basic state pension."
Financial analysis firm Hargreaves Lansdown echoed these concerns. The firm's head of retirement analysis, Helen Morrissey, called the policy "grossly unfair" and a source of further confusion.
"It will be seen as grossly unfair for those pensioners who have income tax taken because they have contributed to a workplace or private pension," Morrissey said. "Some of these pensioners may have incomes that are only fractionally higher and rightly feel aggrieved."
Broader Implications and Political Fallout
The policy has been framed as a stark example of 'fiscal drag' in action, where inflation pushes earnings into higher tax brackets without the government explicitly raising rates. Lord Mackinlay starkly summarised it: "This is where fiscal drag hits the road of reality for millions of taxpayers."
Commentators have warned that the decision will create lasting division. The Telegraph's Rob White argued: "By handing tax breaks to just some retirees, the Chancellor has opened a divide that will grow and grow." The controversy places the Labour government's treatment of savers and pensioners under intense scrutiny, with accusations that the policy actively discourages financial prudence.
The three-year freeze on tax thresholds, combined with the selective pensioner exemption, sets the stage for ongoing debate about fairness, intergenerational equity, and the long-term signals sent to those trying to provide for their own retirement.
