The Chancellor’s decision to freeze income tax thresholds for three years has been labelled “grossly unfair” on pensioners. Last week, Rachel Reeves announced in her budget announced that rates would be frozen, dragging hundreds of thousands of pensioners into the income tax net from 2027-28.
The move could potentially include those on the full new state pension, when annual increases push it above the £12,570 personal allowance. However, the Chancellor later announced that the policy would not apply to those who are solely on the old or new state pension, leading to claims of a “two-tier” pension system. Lord Mackinlay, a Conservative peer and former MP, told the Telegraph: “The elegant solution would have been to give everyone in the country a personal [tax-free] allowance reflecting the basic state pension. It would have been easy and fair.
“But no, this Government has decided to introduce yet another two-tier taxation for those who have worked hard all their life and been diligent. People will ask, what’s the point in saving into a pension? Why did I bother?
“This is where fiscal drag hits the road of reality for millions of taxpayers. This Labour Chancellor has created this.”
Helen Morrissey head of retirement analysis at Hargreaves Lansdown, called it “grossly unfair” on those who had saved into a pension.
She said: “It will be seen as grossly unfair for those pensioners who have income tax taken because they have contributed to a workplace or private pension.
“Some of these pensioners may have incomes that are only fractionally higher and rightly feel aggrieved.”
It remains unclear how the freezing of income tax thresholds will impact pensioners, with some likely to be dragged over the personal allowance threshold if the triple lock remains in place.
Martin Lewis told viewers on his show Martin Lewis Money Show Live on ITV this week that the move could become an administrative nightmare.
He said: “From 2027, because we know the state pension has to rise by a minimum 2.5 per cent because of the triple lock, here’s a projection.
“The minimum it could rise because of the triple lock 2027 – it’s going to be about £12,861, £300 more than the tax-free allowance as that’s staying stable and it will go more and more and more.”
The minimum new state pensions based on the lowest rise would be £12,861 in 2027, £13,183 in 2028, £13,512 in 2029 and £13,850 in 2030, according to the Martin Lewis Money Show Live predictions.
He added: “So you can see the issue that’s going on. My main concern was the admin. How are we going to have 90-year-olds doing self-assessment forms when they’re only earning £50 over the limit?“
Mr Lewis referred back to his interview with Chancellor Rachel Reeves after the Budget where he asked a question from a viewer Rebecca: “Does my 85-year-old father who is living with dementia now have to complete a tax return as his state pension will take him over the personal allowance.”
Ms Reeves replied: “So if you just have a state pension and you don’t have any other pension you don’t have to fill in a tax return. I make that commitment for this Parliament. You’re right, 2027 looks like the time it will cross over. We are working on a solution as we speak to ensure we’re not going after tiny amounts of money.”
Mr Lewis said: “People will have to pay the tax, they just won’t have to do a return, or will they not have to pay the tax?“
Ms Reeves replied: “In this Parliament they won’t have to pay the tax. Further out I’m not able to make any commitments.”