Chancellor Rachel Reeves has said people whose only income comes from a state pension will not have to pay tax.
The state pension is set to rise above normal levels of tax payments in April 2027, with payments increasing and the tax threshold stable.
But Reeves has confirmed that anyone who receives a state pension but no other income will not have to pay income tax before 2030.
This announcement has raised questions about the winners and losers of such a policy. Most pensioners have other pension payments, meaning they already pay tax, and experts say the move could add further complexities to the system.
Anyone receiving the completely new flat-rate state pension – for those who reached state pension age after April 2016 – will get £12,547.60 next year.
This is just below the income tax threshold of £12,570. That limit is fixed and is highly likely to be breached by state pensions from April 2027, meaning the portion of pension income above this limit will be taxed.
Normally small tax amounts will be collected by the simple assessment process where HM Revenue and Customs does all the calculations and sends the year end tax demand to the pensioner.
But the Chancellor said in his speech that if this was the only source of income for the people then they would not have to face administrative problems.
He later told Martin Lewis, founder of Money Saving Expert, that “in this Parliament, he won’t have to pay tax”.
The Conservatives made a similar pledge during the last general election campaign.
Almost three-quarters of pensioners already pay income tax because they have additional income for the state pension.
These include 2.5 million pensioners – including widows and widowers – whose state pension was run under the pre-2016 system. They get basic pension and SERPS pension, which means they pay tax.
Steve Webb, partner at pensions consultancy LCP and former pensions minister, also highlights the very small number of people with private pensions who will have to pay tax.
Workers with income equal to the state pension level will also be taxed, while pensioners will not.
“There is a real risk that pensioners will be treated more favorably on the new system,” Mr Webb said.
“There are no costs for this policy in the budget documents which suggests it is still an idea rather than a concrete plan. But it will be incredibly difficult for the Treasury to come up with something that is practical and fair.”
Rachel Vahey, head of public policy at investment platform AJ Bell, said: “Collecting even a small portion of the tax owed from millions of pensioners has always been an administrative headache for the government.
“It is no surprise that they have pushed the limits of their tax collection thinking to find ways to avoid this, but we will have to wait and see what process they come up with and whether it will really simplify the lives of pensioners.”
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