A new tax rule from HMRC designed to exempt state pensioners from income tax has been branded "deeply flawed" and will benefit only one in 18 retirees, according to former Liberal Democrat pensions minister Sir Steve Webb. The Labour government's plan, set to take effect from 2027, would allow older people to avoid paying income tax if their sole income is the state pension. However, Webb warned that those who reached state pension age before April 2016 would be excluded.
Limited Impact of the New Rule
Sir Steve Webb, who helped create the triple lock system, described the measure as a "sticking plaster solution." He stated: "The vast majority of Britain's pensioners will not be eligible for the Government's plans to exempt certain pensioners from income tax from 2027." According to analysis by his firm LCP, out of 13.2 million people currently receiving a state pension, only around 700,000 will be spared a tax bill starting next year. This leaves approximately 12 million pensioners still liable for HMRC tax bills due to the rising triple lock, which is gradually pushing state pension rates closer to the tax-free allowance threshold.
Criticism of the Policy
Webb highlighted the unfairness of the policy, noting that it discriminates against those on the old state pension system, even if they have identical income to someone on the new system. He also pointed out that it creates "cliff edges" for those who have even a pound of other income. "It may be reasonably easy to defend not collecting, say, £88 in tax from relatively low income pensioners in year one," he said. "But as the years go by the Government would be writing off hundreds of pounds per eligible pensioner per year, at a growing cost to the taxpayer and an ever greater disparity to those with modest other income." He called for a more durable solution, suggesting a general write-off for small tax amounts or a fundamental review of pension and tax allowance levels.
Political Context
The new rule comes as the triple lock on state pensions and frozen tax thresholds are set to collide next year, creating political embarrassment for the government. From 2027, someone with just the new state pension and no other income will start receiving annual tax bills from HMRC. The government's proposed solution, however, has been widely criticized as inadequate and inequitable.
