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Chancellor Rachel Reeves has announced that individuals whose sole income is the state pension will be exempt from paying income tax. This decision comes in light of the state pension rising above the current tax threshold starting from April 2027, a consequence of both increased pension payments and the freezing of tax thresholds. However, Reeves reassured that taxpayers relying exclusively on the state pension will not have to pay income tax on these earnings before the year 2030.
Next year, recipients of the new flat-rate state pension—which applies to those reaching state pension age after April 2016—are expected to receive £12,547.60. This figure falls just below the income tax threshold of £12,570. Nonetheless, since the threshold will remain frozen, it is anticipated that the state pension will breach this level starting in April 2027, potentially subjecting pension income above the threshold to taxation. Normally, small amounts of tax owed would be managed through HM Revenue and Customs’ Simple Assessment process, which calculates tax liabilities and sends pensioners a bill at the end of the tax year. The Chancellor, however, confirmed that those whose pension is their only source of income will be spared this administrative burden. She further emphasized this stance in a conversation with Martin Lewis, the founder of Money Saving Expert, stating, “in this Parliament, they won’t have to pay the tax.”
Despite these assurances, the announcement has prompted discussions about who stands to benefit or lose from the policy. Approximately 75% of pensioners already pay income tax because they have income additional to the state pension. For instance, 2.5 million pensioners—including widows and widowers—still receive pensions under the system predating 2016, which comprises a basic pension supplemented by a SERPS pension, resulting in taxable income. Steve Webb, a partner at pension consultancy LCP and former pensions minister, points out that pensioners with small private pensions would continue to be taxed, while workers earning an equivalent amount to the state pension would not receive such tax treatment. Webb expressed concerns over fairness, saying, “There is a real risk that pensioners on the new system will be more favourably treated.”
Rachel Vahey, head of public policy at AJ Bell, noted the practical challenges of collecting small amounts of tax from millions of pensioners, describing it as an “administrative headache” for the government. She remarked, “It’s no wonder they’ve put their tax collecting thinking caps on to find ways to avoid it, but we will have to wait and see what process they come up with and whether it will indeed make pensioners’ lives simpler.” Webb also highlighted that the absence of a detailed cost estimate in official Budget documents suggests the proposal remains in a conceptual phase, and admitted that crafting a tax system that is both workable and fair will be a formidable task for the Treasury
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