Frozen tax allowance threatens state pensioners
Andy Burnham, the new Labour Prime Minister, is under mounting pressure to address the frozen personal tax-free allowance of £12,570, a key issue he identified during his election campaign. Speaking on BBC Radio 4’s Moneybox programme, Jonathan Cribb, deputy director at the Institute for Fiscal Studies (IFS), outlined two long-term options for tackling the problem: raising the £12,570 threshold for all earners, or reintroducing a higher personal allowance solely for state pensioners.
Host Paul Lewis reminded listeners of Burnham’s own words on the doorstep in his new constituency of Makerfield. “The issue, he said, was mentioned more than any other – the frozen personal tax threshold – that’s the point, of course, at which income tax begins,” Lewis said. “It’s been stuck at £12,570 a year since 2021 despite a law which says it should rise each year with inflation.”
Burnham, who became Prime Minister after winning the leadership and the general election, acknowledged the problem late on Wednesday. According to Lewis, the PM stated “there is no commitment at this point to change, but we will look at that at the Budget.” The frozen threshold has remained unchanged for five years, meaning rising inflation has eroded its real value, pushing more people – including pensioners – into paying income tax.
IFS expert warns of rising tax burden
Jonathan Cribb warned that the impact of frozen thresholds accumulates over time. “At the beginning it doesn’t seem like so much, inflation erodes the value of that allowance, but as we go on the difference between what it is and what it would have been if these tax rises hadn’t happened gets bigger and bigger,” he said. “People are now looking ahead at another four years of these frozen tax thresholds and thinking ‘well that’s a considerable increase in tax that I’m paying’.”
Cribb stressed that unless someone has an extremely low income, they cannot avoid these tax rises. He noted that pensioners are struggling with the cost of living just as much as working-age people. “On average pensioners pay slightly less tax on their income than working age people because of not paying National Insurance,” he said. “I think what’s really obvious here is the lack of growth in earnings of people’s pensions is really becoming very starkly obvious to people particularly in the context of these frozen tax thresholds.”
April 2025 set to be critical for pensioners
The plight will become particularly acute next April, Lewis pointed out, because the state pension is set to rise above the £12,570 lowest tax threshold. “That’s the ultimate giving with one hand and taking with the other, isn’t it?” Lewis remarked. Cribb agreed, saying, “The state pension’s always been taxable but it’s clearly very salient to people for those just reliant on that, that they’re going to be paying income tax.”
The Chancellor has confirmed that the government will not require pensioners to start paying tax on their state pension during this parliament. Cribb clarified that this is partly a technical measure to avoid millions of people having to suddenly begin filing tax returns. “In the longer run there’s a decision needs to be made – are the government going to increase the personal allowance – start increasing it – either for the whole population or going back to what we had a long time ago which was a higher personal allowance for pensioners,” he said.
Cribb concluded with a stark fiscal reality: “If they want to do that to allow the personal allowance to grow again they’ll need to cut spending elsewhere or raise some other taxes.” The IFS deputy director’s comments underline the difficult trade-offs facing the Burnham government as it prepares its first Budget.
