HMRC cuts 7.7m state pensioners out of tax rule – ‘serious unfairness’ | Personal Finance | Finance

Millions of pensioners are set to miss out on a planned tax exemption despite Government promises to shield retirees from new HMRC bills, according to fresh analysis warning of “serious unfairness” in the system. Research by pensions consultancy LCP identifies a number of what it characterises as serious problems, suggesting fewer than one million pensioners will benefit from Labour’s proposed tax concession from 2027, leaving around 7.7 million state pensioners automatically excluded.

The issue has emerged because the full new state pension is expected to overtake the frozen personal tax allowance within the next two years. The standard rate of the new state pension currently stands at £12,548 a year, only slightly below the £12,570 personal allowance, which is frozen until 2030. Under current forecasts, pensioners relying solely on the new state pension would begin receiving tax bills from HMRC through its “Simple Assessment” system from 2027.

The annual bills are expected to start at around £88 in 2027/28 before rising to £220 by 2029/30.

To avoid the political fallout of pensioners being taxed on the state pension, Chancellor Rachel Reeves announced plans in last year’s Budget to exempt certain pensioners from paying the charge.

The Treasury said the move would remove the administrative burden for pensioners whose only income is the state pension.

However, LCP’s analysis found the exemption would apply to only around 700,000 people — roughly 5 % of the UK’s 13.2 million pensioners.

The biggest group excluded are pensioners on the old state pension system.

Researchers said none of the 7.7 million people receiving the old basic state pension would qualify because the old pension rate remains well below the tax threshold.

Many of those pensioners also receive “additional” state pension payments, meaning they would fail the Government’s test that recipients must rely solely on the standard pension with no extra income.

LCP said more than four in five people on the newer pension system would also miss out.

The report found around 1.8 million pensioners on the new state pension have other taxable income, such as private pensions or investments, automatically disqualifying them from the concession.

Others would miss out because they receive “protected payments” on top of the standard state pension or because their pension income remains below the tax threshold.

Former pensions minister Steve Webb said the policy created unfair differences between pensioners with similar incomes.

He said: “Two separate policies – triple lock uprating of the state pension and freezing of tax thresholds – will collide next year. From 2027 onwards, someone with just the new state pension and no other income will start getting annual tax bills from HMRC. This is politically embarrassing for the Government, but the proposed solution is deeply flawed.”

Mr Webb warned the plans would discriminate against pensioners on the old system even where they receive the same overall income as somebody on the new state pension.

He also warned of “cliff edges” where pensioners with even £1 of additional income could lose the exemption entirely and face significantly higher tax bills.

LCP said somebody narrowly missing out on the exemption in 2027/28 could face not only tax on their extra £1 of income but also the full £88 tax charge on their state pension.

The consultancy warned the disparity would widen in future years as the tax bills rise.

Alasdair Mayes, head of pensions tax at LCP, said the plans risked adding further complexity to the tax system.

He said: “This is another example of a seemingly well-intentioned policy announcement adding complexity and unfairness in the tax system. A simple and transparent tax system would be a benefit to all.”