The oldest pensioners could miss out on relief from income tax worth as much as £770 under plans the Chancellor is set to announce in this week's Budget, with concerns the measure may only protect under-75s on the newer state pension scheme.
Chancellor John Healey reportedly plans to raise the income tax threshold to £13,036 for the poorest pensioners, matching the new state pension rate that takes effect next April. However, fears have emerged that this protection might exclude older pensioners still on the pre-2016 basic state pension system, potentially creating what a former pensions minister has called a 'two tier' system. The scheme would cost £200 million a year by 2030, according to reports. Those relying solely on the state pension were facing income tax for the first time from next April, as the annual amount would exceed the current income tax threshold of £12,570. According to pensions firm Standard Life, the new tax-free allowance could save those on just the state pension £93 in the first year, rising to £770 if the policy remains in place by 2031, assuming the state pension rises by 2.5 per cent annually.
Those earning even small amounts from private pensions look set to be excluded from the new tax rate alongside older pensioners, and full details have yet to be announced. People on the old basic state pension will receive a rise of £7.20 a week to £192.10 next April, or around £10,000 yearly, still below the income tax threshold. However, many receive additional payments called S2P or Serps based on earlier earnings, and these top-ups often push them into paying tax already. Former Pensions Minister Ros Altmann warned the proposals could create 'an age penalty for pensioners in future', with those over 75 potentially facing tax on income just above £13,000 while younger pensioners on the same amount would be exempt.
Steve Webb, a former Pensions Minister now at pension consultants LCP, cautioned the scheme 'looks messy and increasingly expensive' as the gap between the new state pension and the frozen tax threshold widens yearly. He added there could be a growing 'cliff edge' problem where those with small amounts of private income lose the entire allowance and end up worse off than those with nothing. Kate Smith, head of pensions at Aegon, warned the proposals could be seen as unfair by people who saved through workplace and private pensions. Tom Selby, director of public policy at AJ Bell, noted the attempt to fulfill former Chancellor Rachel Reeves' promise risked creating 'a mess of complexity, odd incentives and obvious unfairness in the tax system'.
Patrick Thomson, head of policy at Standard Life Centre for the Future of Retirement, said much would depend on the detail of the protection and who qualifies. He warned that if it applies only to those whose sole income is the state pension, people with even modest workplace or private pension income could still be affected, meaning what appears simple could become more complicated over time.