A proposal to spare pensioners from paying income tax when the state pension exceeds the personal allowance is facing significant criticism. Former Pensions Minister Steve Webb warns the plan ’risks being unfair and unworkable,’ creating new complexities. The issue arises because the state pension is set to outgrow the frozen income tax threshold by 2027, potentially leaving retirees with a small tax bill, such as £58, on their state pension income.
The core of the unfairness lies in who would benefit. The exemption would only apply to those whose sole income is the new state pension, leaving out millions of pensioners on the old state pension system who already have incomes above the tax threshold. It would also penalize those who saved modestly into a private pension, as they would still be taxed, while their neighbors with no private savings would be exempt, creating a disincentive for personal saving.
Steve Webb further points out that an employee and a pensioner on the exact same income would be treated differently, with the employee paying both tax and National Insurance. He estimates that ten million pensioners could be paying income tax by the end of the decade due to the frozen threshold. The Treasury has stated it will explore ways to avoid collecting the tax from affected pensioners, but critics argue a fair and workable solution has yet to be found.
