The state pension is expected to increase by 3.9 per cent in April next year, thanks to the triple lock.
This news may be welcomed by many pensioners, but it comes with a sting in the tail, which is causing the Government a headache.
In April 2027, for the first time, the new state pension – payable to most people who reached state pension age from 2016 onwards – will exceed the tax-free personal allowance of £12,570. Those on the state pension alone will owe just upwards of £90 in tax if nothing changes.
This leaves the Government – which has committed to keeping the triple lock for the rest of this Parliament – stuck between a rock and a hard place.
The process of getting the money from these pensioners would be bureaucratic, messy, disproportionately expensive, and will lead to very little being raised. There’s a general consensus this would not be a good outcome.
The Government could just increase the personal allowance for everyone, in line with the state pension increase, but there are problems with this.
Firstly, it would be expensive. To make this adjustment for 30 million taxpayers, just to accommodate a few hundred thousand pensioners, would cost the Treasury somewhere between £1.5bn and £2bn a year and it would rise over time. This is not money the Chancellor, John Healey, has just lying around.
It would also set a precedent. Would the Government want to have to keep doing this, year after year?
There are alternatives. Ahead of the 2024 election, Rishi Sunak proposed a triple lock plus, whereby the personal allowance for pensioners would be unfrozen and would rise in line with the triple lock increases in the state pension.
This would eliminate the tax liability and tax return problem for those pensioners living solely on the state pension. It would also reduce the cost to the Chancellor, as it would be targeted at pensioners rather than the whole population.
However, it would still risk exacerbating the generational divide, as pensioners would enjoy another tax break unavailable to the working-age population. It would also be a difficult policy for Labour to adopt: in 2024, Labour’s then-shadow chancellor Rachel Reeves described Sunak’s policy as a “desperate gimmick”.
This Government has already said it will not collect small amounts of tax that arise from the state pension via simple assessment – an automatic tax calculation sent by HM Revenue and Customs (HMRC) – though they haven’t yet worked out how they’re going to implement this policy. Time is running out.
Personally, I’d go in a different direction. I’d seek to stem the progressive intrusion of HMRC into our lives.
The UK already has one of the longest, most complicated tax codes in the world. We need less tax regulation, not more.
Pensions in particular are already bedevilled with complicated rules and allowances.
What I’d do is a simple exemption, whereby if your total tax liability is less than, say, £100, you just don’t have to submit any paperwork and HMRC should just write off the sum.
This would apply equally to pensioners and workers – so those on low incomes that are in their 50s, 40s and 30s would benefit too.
But it doesn’t come with the huge cost of upping the personal allowance for everyone.
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