State pension update over ‘unsettling letter’ from HMRC | Personal Finance | Finance
A major change to the state pension is coming in over the next few years. In the Autumn Budget, the Government said that it would make sure those whose sole income is the state pension would not have to pay small amounts of income tax via self assessment from 2027/2028.
A document released with the Budget said: “The Government is exploring the best way to achieve this and will set out more detail next year.”
This was an important clarification as the full new state pension will rise from the current £230.25 a week to to £241.30 a week from next April, or £12,547.60 a year, when payments rise 4.8 percent thanks to the triple lock. This is just below using up all the £12,570 personal allowance and becoming subject to income tax.
The triple lock ensures payments rise in line with whichever is highest of inflation, the rise in average earnings or 2.5 percent. Even with the minimum 2.5 percent rise, the full new state pension would attract a tax bill from April 2027.
Chancellor Rachel Reeves has now confirmed that those whose only income is the state pension will not pay tax for the duration of this Parliament.
Steven Cameron, pensions director at wealth firm Aegon, said more detail is needed about how this will work. He said: “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. 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 said not having to fill in a simple assessment may be a big help to more vulnerable pensioners. He said: “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.”
However, exempting those whose sole income is the state pension comes with its own issues. Mr Cameron said there are several issues around fairness to consider here.
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.”
Another question is why state pensioners should not have to pay tax when they cross the personal allowance threshold, while working age people do, even if they are on a relatively low income.
