Older retirees who retired before 2016 will not benefit from a state pension tax write-off promised by Labour Party Chancellor Rachel Reeves, it has been warned. The Labour Party government has promised no tax on state pensions as the amounts edge towards the personal tax-free allowance from HMRC.
New State Pension Rise
The new state pension will rise by at least 2.5 per cent in April next year, taking it above the £12,570 tax-free personal allowance for the first time and generating millions of new tax bills.
Last year, ahead of Christmas, Chancellor Rachel Reeves announced that retirees surviving on the state pension alone would not have to pay income tax. But the move would benefit just 800,000 of Britain's 13.2 million state pensioners, according to estimates.
Exclusion of Pre-2016 Retirees
It would exclude anyone who reached retirement age before April 6, 2016, consultancy LCP found. Sir Steve Webb, a former Liberal Democrats and Conservative Party coalition government pensions minister, now of LCP, said the exemption was a "sticking plaster". LCP reports nobody who is receiving the "old" pre-2016 state pension will benefit from the exemption.
Sir Steve said: "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. It discriminates against those on the old state pension system, even if they have identical income to someone on the new system, and creates unwelcome 'cliff edges' for those who have even a pound of other income. It is also clearly a temporary sticking plaster solution for a problem that will have to be addressed at some point."
Expert Reaction
Helen Morrissey, of Hargreaves Lansdown, said: "This change will relieve the admin burden on some pensioners, who may have suddenly had to fill in a simple assessment form for the first time. However, it will be seen as hugely unfair by others who may have struggled to save into a small pension and now face paying tax. Every penny counts when you are on a lower income and they might find themselves looking at those on a similar income, who don't pay any tax, and asking 'what's the point in saving into a pension?'"
