State pensioners warned they aren’t covered by Reeves’ tax pledge | Personal Finance | Finance

Rachel Reeves’ pledge that pensioners whose only income is from the state pension won’t have to pay tax on it applies to fewer than a million people, analysis has suggested. The Chancellor made the promise in November, but a report from pension consultancy Lane Clark & Peacock (LCP) says of the 13.2million people who receive a state pension, less than one million will be covered by the policy.

Ms Reeves made the pledge as Government figures showed that by April next year the new state pension rate would exceed the threshold for income tax. The new state pension is currently set at £12,548 a year, while the income tax threshold is £12,570 and is due to remain frozen until 2030.

LCP says as a result of this situation a pensioner reliant on the new state pension would receive an annual tax bill from HMRCestimated at about £88 in 2027-28, increasing to £153 in 2028-29 and £220 in 2029-30.

The exemption will also only apply to people who reached state pension age from April 2016, when the new state pension came in.

It won’t apply to people on the old, basic state pension even if they also receive money from the old additional state pension, which is also known as the State Second Pension or SERPS.

Former pensions minister, Steve Webb, a partner at LCP, told The Times the policy discriminates against people on the old state pension system even if their income is the same as someone on the new system.

The co-author of LCP’s report added: “It is also clearly a temporary sticking plaster solution for a problem that will have to be addressed at some point.

“A general write-off when people owe small amounts of tax would probably be a cleaner solution, although a more fundamental review of pension and tax allowance levels is clearly needed.”

Mr Webb said of the roughly five million people on the new state pension, about 86% would not benefit from the Chancellor’s exemption.

The report warns the problem will only get worse if governments continue to simultaneously freeze tax thresholds while increasing state pensions.

LCP’s report examines two solutions, including increasing the tax allowance for all pensioners. However, the authors conclude such a move would come at “considerable” cost and benefit more than eight million pensioners who already pay tax.

A cost effective solution put forward in the report suggests writing off “small” tax bills for pensioners instead. The report notes this avoids benefitting better off pensioners, remove the differences between the old new systems as well as reducing the cliff edge risk of just £1 tipping someone into paying tax.