The freeze on the threshold which is pulling more pensioners into paying tax should be ended, Chancellor Rachel Reeves has been told.
Sandra Wrench, who worked for the Department for Work and Pensions (DWP) for 40 years, is among the critics of the policy. She pays more than £1,600 in tax on her own state pension.
Wrench said taxing pensioners is “unfair” – warning that some older people may struggle with a tax bill in retirement.
Reeves announced a freeze on the tax-free personal allowance threshold at £12,570 until 2031 at her recent Budget.
Financial experts quickly pointed out that those living on the new state pension, which will be £12,547 a year, would have to start paying tax from April 2027 – when the sum goes over the threshold for the first time.
Soon after the Budget, Reeves promised to make sure that the poorest pensioners – whose sole income is the state pension – would be exempt from tax.
HMRC officials confirmed to MPs this week that they are looking at a mechanism to make sure those on the basic or new state pension, with no other income, will not be liable for tax.
Cerys McDonald, the director of HMRC’s individuals policy, confirmed that legislation would be required for the change. It should be in place in time for April 2027, she added.
‘Why should some be exempt from tax and others have to pay?’
Wrench, who worked at the DWP for more than four decades, including nearly 20 years on pensions, said the exemption does not go far enough.
The 74-year-old from Bedford thinks it is unfair on those – like her – who have already starting paying tax on their pension.
Wrench said many living on the “old” state pension – given to people who reached qualifying age before April 2016 – could be slightly over the threshold.
Many on the old state pension get additional state pension payments related to their National Insurance history.
“I think it’s unfair,” Wrench told The i Paper. “It’s effectively age discrimination.”
“Why should some people be exempt from paying tax, whereas others who are older and have the old state pension, are not exempt?”
Caption: Sandra Wrench worked for the DWP for over 40 years (Photo: Supplied)Some with a modest amount of extra income, either from savings or an occupational pension, which tips them over the tax threshold will also miss out on the exemption.
Wrench said she pays £1,633 a year in tax on her old state pension. “I’m not struggling to pay the tax, but I worry there are people who will struggle.
“There will be people who also have a very small occupational pension, so they won’t be exempt, and they will still have to pay tax,” she added.
‘Reeves has opened a Pandora’s Box of problems’
Dennis Reed, the director of the Silver Voices pensioner campaign group, said the issue that Wrench had identified was “a grossly unfair anomaly which we will be campaigning to change”.
“Rachel Reeves has opened a Pandora’s Box of problems with her last-minute Budget concession. The only fair solution is to unfreeze the lower tax threshold for all.”
Silver Voices has suggested that raising the tax-free threshold for all pensioners by even £1,000 – then increasing it annually – would keep older people on low incomes free from a tax bill.
Wrench agreed that raising the threshold for all pensioners would be better than trying to “means test” and identify particular people for exemptions.
“If the Government raised the threshold by £1,000, it could save a lot of headaches for pensioners, and save a lot of headaches for the DWP in working out who has to pay tax,” she said.
Wrench has written to Labour’s pensions minister Torsten Bell to point out the “unfairness” of the Government’s plan.
‘How I doubled my state pension’
The ex-civil servant also told The i Paper about how she effectively doubled her own state pension payments to enjoy a more comfortable retirement.
Wrench became eligible for her state pension just before she turned 62. But she decided to keep working her job part-time, deferring her state pension for just over seven years to increase the payments.
Because she delayed her retirement in this way, Wrench was given an extra one per cent on her state pension income for every five weeks she deferred.
She finally retired and took the state pension at the age of 69. Instead of getting £150 a week if she had retired at 62, she began receiving over double that amount – £310 a week.
The “triple lock” increases in the state pension over the past five years means she now gets £398 a week, around £20,700 a year.
Some are able to get more money by deferring their state pension (Yau Ming Low/Getty Images)“Despite having back problems, I was able to keep working part-time for most of my sixties.
“It worked well for me because it helped me boost my income in retirement. It has made things a bit more comfortable.
“I was lucky, exceptionally lucky, that I could defer for so long. Many people won’t be able to do it for too many years, if they have health issues. But I think there will be people who will find it beneficial to defer.”
Wrench benefited from the old state pension arrangements, since she reached state pension age before April 2016.
Under the old state pension, payments were increased 10.4 per cent for each year someone defers. But under the new state pension, the increase is only 5.8 per cent a year.
“I suppose I was pretty jammy. The deferment rate isn’t quite as good now. But it could still be a good option for people who are in a position to defer,” she said.
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A Treasury spokesperson defended the “fair and necessary decisions” made at the Budget.
They said UK pensioners “benefit from the highest personal allowance among the G7”, adding: “Our commitment to the triple lock means 12 million pensioners will receive an increase of up to £470 a year – worth £1,900 over the Parliament.”
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