HMRC is excluding an eye-watering seven million state pensioners from its new tax exemption, despite Labour Party government promises to shield retirees from new tax bills. Law firm LCP has warned that fewer than one million pensioners will benefit from Labour’s proposed tax concession from 2027, leaving around 7.7 million state pensioners automatically excluded.
Tax Threshold Freeze Causes Collision
Because the full new state pension is expected to overtake the frozen personal tax allowance within the next two years, Labour Party Chancellor Rachel Reeves has assured pensioners relying solely on the new state pension will not begin receiving tax bills. However, LCP’s analysis found the exemption would apply to only around 700,000 people — roughly 5 percent of the UK’s 13.2 million pensioners.
Old State Pension Recipients Excluded
The biggest group excluded are pensioners on the old state pension system. Researchers said none of the 7.7 million people receiving the old basic state pension would qualify because the old pension rate remains well below the tax threshold. Many of those pensioners also receive “additional” state pension payments, meaning they would fail the Government’s test that recipients must rely solely on the standard pension with no extra income. LCP said more than four in five people on the newer pension system would also miss out.
Expert Criticism
Former pensions minister Steve Webb said: “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.”
Alasdair Mayes, head of pensions tax at LCP, added: “This is another example of a seemingly well-intentioned policy announcement adding complexity and unfairness in the tax system. A simple and transparent tax system would be a benefit to all.”
