Pensioners are facing a major shift to the state pension over the coming years, with the Government pledging to protect those relying solely on state pension from tax assessment processes from 2027/2028
Pensioners are bracing themselves for a significant shake-up to the state pension over the next few years – and one expert has warned that recipients could one day receive an ‘unsettling’ letter through the post.
In the Autumn Budget, the Government promised to protect those depending entirely on the state pension from being hit with modest income tax bills through self assessment from 2027/2028.
A Budget document stated: “The Government is exploring the best way to achieve this and will set out more detail next year.”
This explanation proved crucial as the full new state pension is poised to leap from the current £230.25 weekly to £241.30 from next April, equating to £12,547.60 per year, as payments soar by 4.8 per cent courtesy of the triple lock.
This pushes the sum dangerously near to consuming the entire £12,570 personal allowance and sparking an income tax liability. The triple lock ensures payments climb in accordance with whichever proves highest among inflation, the growth in average earnings or 2.5 per cent.
Even with the baseline 2.5 per cent increase, the full new state pension would generate a tax bill from April 2027. Chancellor Rachel Reeves has now given her assurance that those whose sole income is the state pension will not face tax for the duration of this Parliament, reports the Mirror.
Steven Cameron, pensions specialist at wealth management firm Aegon, has offered his perspective on how the Government might fulfil this pledge. He remarked: “While legislation may not be needed, the Government needs to explore how to deliver on this.
“If tax were to be collected, state pensioners would currently face carrying out a simple tax assessment – effectively receiving a letter from the taxman through the door, which would have been unsettling for many, even if the actual amounts due were minimal. It’s hard to see what the alternative would have been other than finding a way to deduct any tax due directly from the state pension for the first time.”
The implementation could prove challenging and expensive, as the expert noted: “This might have involved complex new data exchanges between the DWP and HMRC, which would need careful consideration and could have been costly to implement.”
He argued that sidestepping the simple assessment bureaucracy might offer a crucial reprieve for Britain’s most vulnerable elderly citizens.
The specialist warned: “This could have been a cause for concern for many state pensioners. Some might have had no savings ‘buffer’ to pay even a small tax bill, and this could have caused a lot of anxiety.”
Yet exempting pensioners dependent entirely on state support creates its own set of challenges. Mr Cameron emphasised there are multiple equity issues requiring careful examination.
He explained: “State pensioners with no income other than the state pension might very well feel it is unfair that they might have had to pay income tax on part of this – a case of the Government giving with one hand and taking with the other. There are many pensioners who have both a state and a private or workplace pension, taking them above the personal allowance.
“They pay income tax on all income above the personal allowance, so may question the fairness of those pensioners who haven’t saved in a private or workplace pension being exempt from income tax. You could have two pensioners on exactly the same total pre-tax income but the one who has a combination of private and state pension would be subject to income tax, whereas the one with state pension only wouldn’t.”
A pertinent question being asked is why pensioners receiving the state pension should avoid taxation when their income surpasses the personal allowance threshold, while working-age individuals are taxed, even on relatively modest incomes.
Chancellor Rachel Reeves recently assured Martin Lewis, founder of Money Saving Expert, that for those whose sole income is the state pension, “in this Parliament, they won’t have to pay the tax”.
