Prime Minister Andy Burnham is being told to ensure his state pension tax exception “protects all retirees on low incomes” by leading anti-poverty groups.
Charity Independent Age is demanding the new Labour leader to ensure his pledged state pension income tax exemption shields all older people on modest incomes, not just those without any additional pension income.
Last week, the new PM’s administration reaffirmed his Government’s promise that retirees dependent on the state pension would not face an income tax bill.
The commitment addresses a looming problem created by fiscal drag, which threatens to pull state pension payments above the income tax threshold for the first time.
The Treasury has confirmed that pensioners whose only income is the full new or basic state pension will remain exempt from income tax.Fiscal drag occurs when tax thresholds remain frozen while incomes continue to rise, gradually pushing more earners into paying tax or into higher tax bands.
The personal allowance, the amount someone can earn before owing income tax, has been held at £12,570.
The triple lock mechanism guarantees the state pension increases annually by whichever is greatest: inflation, average wage growth, or 2.5 per cent.
This ensures payments climb steadily year on year. Currently, the full new state pension is worth £230.25 weekly. That keeps the annual total just below the personal allowance, meaning recipients do not yet owe income tax on it.
However, with the threshold still frozen and pension payments set to keep rising, the gap between the two figures is narrowing rapidly.
Chancellor John Healey is set to uphold the pledge originally made by his predecessor Rachel Reeves, ensuring that pensioners relying entirely on state pension income will not be hit with a tax charge as payments increase.
A Treasury spokesperson said: “Anyone whose only income is the full new or basic State Pension without any increments will not pay income tax and we are committed to that over this Parliament.”
The guarantee notably applies only to those without any additional increments on top of their standard state pension entitlement.
Morgan Vine, the director of Policy and Influencing at Independent Age, said: “Recommitting to exempting the state pension from income tax is a welcome signal that the new Prime Minister is listening to the concerns of older people on low incomes.
“However, questions remain about how the policy will be implemented across a complex pensions system where one solution does not.”
“Different versions of the state pension mean some older people receiving a lower state pension and a small private pension would be dragged into the tax system, while others receiving only the State Pension will be exempt, despite the amount they receive being largely the same,” she said.
