Prime Minister Andy Burnham has confirmed that state pensioners born before 1960 will be granted a special HMRC income tax exemption, fulfilling a pledge made by former Chancellor Rachel Reeves to ensure no tax is paid by those living solely on the state pension. The decision comes as the triple lock mechanism pushes state pension payments above the £12,570 personal tax-free allowance threshold.
Background to the Exemption
The triple lock guarantees that the state pension increases each year by the highest of inflation, average earnings growth, or 2.5%. With recent high inflation and earnings growth, pension payments have risen significantly, risking tax liability for many pensioners. Burnham has reaffirmed his commitment to Reeves' promise, stating that the government will maintain a tax-free pension for those with no other income.
House of Commons Report Findings
A House of Commons report released on July 11 highlighted widespread confusion about pensions among the working-age population. It noted that “all the participants mentioned the low level of understanding about pensions among the entire pre-retirement population, not just younger people.” The report called for simplified terminology and awareness campaigns to encourage earlier pension planning.
The report also documented cases where individuals expected to access their state pension earlier than permitted, or struggled with small public sector pensions. “Having to pay tax on their State Pension was not something they had anticipated,” the report stated. It added that some pensioners are “too proud” to seek help and resort to loans or unsustainable income sources.
Impact on Pensioners
The exemption will apply automatically to pensioners born before 1960 who rely solely on their state pension. Additionally, Burnham has introduced automatic £300 payments for state pensioners to further alleviate financial pressure. The government aims to balance sustainability, adequacy, and fairness, as emphasised in the report: “In future decisions, on the State Pension and other state entitlements for pensioners, it will be important for the government to balance sustainability, adequacy and fairness.”
Triple Lock Commitment
The government has committed to maintaining the triple lock for the remainder of this Parliament, with a “revealed objective” of a slightly higher level of state pension. However, the Second Pensions Commission noted that the state pension alone may not guarantee adequacy. The tax exemption ensures that the most vulnerable pensioners are not penalised by rising pension values.
Burnham's policy is part of a broader effort to address pensioner poverty and simplify the pension system, aligning with recommendations from the House of Commons report to improve financial education and support for retirement planning.
