John Healey is said to be lining up a massive boost for pensioners in the Budget. In practice, only a minority will benefit.
State pensioners may face tax cliff edge under John Healey’s Budget proposal (Image: Getty)
Former chancellor Rachel Reeves left behind a pension tax headache. With the personal allowance frozen at £12,570 until April 2031, the state pension is on course to exceed the tax-free threshold next April. The anticipated 3.9% triple lock increase would take the full new state pension to about £13,036 a year, some £466 above the allowance. That could leave somebody receiving the full amount facing an income tax bill of about £93 a year, despite having no other income.
Reeves tried to get around the problem by pledging that pensioners whose only income was the basic or new state pension would not have to pay income tax. But the details of how the Government intends to deliver that promise have yet to be fully set out. Now, ahead of the Budget, the Treasury is trying to sort out the mess. It is also grappling with Reeves’s proposed Cash ISA reforms. She may have gone, but her legacy is keeping officials busy.
According to The Times, Healey is expected to confirm next April’s 3.9% state pension increase to £13,036, based on the earnings element of the triple lock. To stop the full new state pension pushing some people over the tax threshold, he is reportedly planning to raise the personal allowance for pensioners on low incomes to £13,036 as well.
The measure is expected to help about one million pensioners and cost around £200million a year by 2030. It may sound simple enough but it will be messy in practice. The Treasury would need to identify those who qualify and ensure their tax treatment changes if their circumstances alter. The allowance needs to keep pace with future state pension increases if the Government wants to prevent the same problem recurring.
Low-income pensioners will welcome the protection, and Labour will make a big fanfare about it on Budget day. It may even be presented as compensation for threatening to scrap the hugely popular triple lock from 2030, if Andy Burnham wins the next election. But there is a potential sting in the tail.
If the special treatment is restricted to people whose sole income is the state pension, those with even a small amount of additional taxable income could find themselves facing a costly cliff edge. That might include someone with a modest workplace or personal pension, earnings from a part-time job or taxable savings interest.
Someone with the full new state pension and no other income could escape tax, while a person receiving just £1 more could lose their exemption face a minimum bill of about £93 on income above the ordinary £12,570 allowance. In practice, they could pay a lot more.
That would be a particularly frustrating outcome for pensioners who have managed to save a little extra for retirement, only to find themselves treated less favourably than someone who has not.
The estimated one million beneficiaries would be a tiny minority of the UK’s roughly 13.5million pensioners. The other 12.5million would get no direct benefit from this particular measure, and their income tax bills will relentlessly climb.
This is what happens when politicians start tinkering with a tax system that is already too complicated. One problem is patched up, another potentially emerges, and everyone is left trying to work out where they stand.
So don’t get too excited if Healey announces this in the Budget. First, work out whether you qualify, or are about to be pushed over a cliff.