It’s hard to overstate the indulgence and sentimentality with which politicians treat pensioners. That may be good electoral strategy (as older people are more likely to vote than younger ones) but it’s a terrible basis for public policy. And this dismal process is happening again with news that the full state pension will, from next year, exceed £13,000.
This will take it above the tax-free personal allowance of £12,750. Hence recipients of the state pension will be liable for tax on it, or rather on the increment that exceeds the allowance. This presents a quandary for the government. Rachel Reeves, the former chancellor, pledged to shield the state pension from income tax. Opposition politicians are scrambling to demand her successor make good on this promise.
The furore is as unseemly as it is predictable. The state pension is income, like the wages and salaries that working-age taxpayers earn in employment. Of course recipients should be taxed on it. It would be an injustice to exempt pensioners and continue to load the costs of public services on to younger taxpayers.
The issue arises not through happenstance but because pensioners have been treated generously by successive governments. The triple-lock mechanism, in place since 2011, pegs increases in the state pension to the highest of growth in average earnings or consumer prices, or 2.5 per cent.
Data this week showed 12-month earnings growth of 3.9 per cent – this is likely to be the figure used to up-rate the full new state pension. And as the personal allowance has been frozen since 2021, and is legislated to continue at the same level to 2031, those whose sole earnings are the full state pension will be brought into the tax system.
In short, it’s because pensioners’ incomes have been not just protected in real terms but far exceeded increases in the cost of living that they’ll now be liable for tax. For working-age taxpayers reliant on income from employment, the years since the financial crash of 2007-09 have encompassed painful austerity. Yet to listen to the pensioners’ lobby and the politicians who flatter them, you’d think retirees are victims here.
The Tories complain that “people living on nothing but their state pension are now facing a tax bill for the first time ever. Many will spend the last years of their lives filing tax returns or hanging on HMRC telephone helplines”. And the Lib Dems say pensioners are “being caught by the stealth tax put in place by the Conservatives and extended by Labour”.
It takes a lot to make me cry, but rather less to make me hoot in derision. The complaints are spurious. The proper response of politicians should be to explain to pensioners they’ve been treated generously over many years – not by governments, as they have no money of their own, but by taxpayers who have provided their pension income. And the policy John Healey, Reeves’s successor, should adopt is to do nothing, and let them pay the tax.
Following this course would be a first step in restoring the principle of intergenerational equity to policy debates. You’d hear much griping along the lines that the state pension is among the lowest in Europe, and that pensioners have paid national insurance contributions all their working lives, but these are non sequiturs.
Retirees have not paid for their state pension – it’s provided by today’s taxpayers. And the system of pension provision in this country relies on generous tax reliefs on employer and employee contributions to occupational schemes. Some retirees even receive defined benefit pensions, which have all but died out for new entrants in private-sector employment.
There is a pragmatic case for not charging tax on the state pension for those for whom it’s their sole income. Or at least for not charging it yet: the administrative costs are likely to outweigh the small sums collected. But so long as the triple lock persists, and the personal allowance is frozen, the balance will shift. There is no principled reason to exempt retirees from paying tax on their state pension, and they should submit to this without complaint.
The tax system in this country is dysfunctional. I could wish there were a genuine social compact on the type and range of public services voters want, and on how to generate the revenues to pay for them. Instead we get frivolous answers like wealth taxes and “efficiency savings”. But as the ratio of older people to the working-age population increases, pensioners should be paying their way. It’s their civic and patriotic duty – and if they can’t find the words to express this, they should at least avoid whingeing about it.
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