Plans to tax winter fuel payments for better-off pensioners have sparked warnings from experts, who say the policy could create confusion, unfairness and administrative headaches.
Ministers are reportedly considering restoring the payment to all pensioners, after a backlash over its restriction last winter, but clawing some of the money back through the tax system.
Winter fuel payments, worth between £200 and £300 a year, were removed from most pensioners by Rachel Reeves last July and limited to those receiving pension credit.
The idea of reinstating it universally and recouping the cost through tax was floated by former Labour shadow chancellor Ed Balls on the Political Currency podcast, which he co-hosts with George Osborne.
While the approach is seen as simpler than means-testing, experts have pointed to major flaws, drawing comparisons with the much-criticised child benefit charge introduced under Osborne.
Here, The i Paper speaks to the experts to find out what this means – and the issues it could cause.
Earlier this month, Sir Keir Starmer said he wanted “more pensioners to receive the payment” after around 10 million lost it last year.
Winter fuel payments used to be universal, but last autumn, the Government changed the system so that only the poorest pensioners – receiving pension credit – got it. The aim was to save around £1.5bn.
In recent weeks, Downing Street has insisted that it is still deciding when any changes to winter fuel payments will happen, with final decisions to be made at “a fiscal event,” which is likely to be this autumn’s Budget.
One option reportedly being considered is taxing winter fuel payments for high-earning pensioners.
Speaking to former Conservative chancellor George Osborne, Ed Balls said: “That’s what you did with child benefit – and you can do that because the higher income pensioners will be doing their tax returns, you have got their income information.”
The high-income child benefit charge (HICBC), which child benefit recipients pay if their income goes past a certain threshold, has proved controversial since its introduction in 2010 and has resulted in several high-profile cases at the tax tribunal against the levy.
It operates by clawing back payments where one parent earns more than £50,000 If an individual’s income is over £60,000, the entire child benefit is clawed back.
U-turn might be bad politically
Some experts have pointed out that changing the winter fuel payment system at this stage may not be particularly good politically for the Government.
Stephen Barber, professor of global affairs at the University of East London, said there may be “some justifiable economics” behind the policy of taxing winter fuel payments, but noted it has been a “political disaster.”
Speaking to The i Paper, Professor Barber said the Government had been “obstinate,” refusing to compromise, and argued it “might have avoided the worst of the criticism by more thoughtfully handling” the change.
He added that the late U-turn leaves “insufficient time to properly scrutinise the impact of the retreat, either for the Exchequer or pensioners,” and that “means testing will inevitably mean bureaucratic costs.”
Ultimately, he said, “chances are it is now too late for the Government to bank any political credit for finally listening to public opinion.”
A Freedom of Information request by Sir Steve Webb, former pensions minister and partner at LCP, revealed that one million pensioners pay income tax at 40 per cent or more, while 7.8 million pay at the basic rate, of 20 per cent.
Sir Steve explained that clawing back payments from higher-rate taxpayers would recover only £200m in total.
This compares with the around £1.5bn original estimate of the full-year revenue from the initial means-testing of the policy, meaning he said “it would be giving back almost all of the revenue.”
Even making the payments taxable for all recipients would only raise around £400m, he added, “still leaving a big hole in the Chancellor’s already tight budget arithmetic.”
‘It would be much simpler for the Government to perform a full U-turn’
Tom Selby, director of public policy at AJ Bell, said shifting winter fuel payments from a universal system to one based on income risks creating “practical challenges” and unfair outcomes.
“Anything that moves from universality to means-testing will come with complications,” he said.
Mr Selby warned that clawing back payments for those over a certain income threshold could skew financial decisions, especially as pensioners can take income in uneven lumps throughout retirement.
He said: “People accessing their retirement pot would have an incentive to stay below the higher rate to keep the payment.”
Wealthier pensioners with large savings but modest incomes could still qualify, he added.
“Frankly,” he said, “it would be much simpler for the Government to perform a full U-turn.”
The Treasury has been contacted for comment.
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