A commitment by the UK government to keep the state pension tax-free until 2030 is under examination as concerns arise over potential inequities within the system. Chancellor Rachel Reeves has reiterated this promise in her recent Budget speech, indicating that individuals who receive only the state pension will not be subject to income tax in the coming years.
This assurance comes as the state pension is projected to exceed the basic income tax threshold of £12,570 by April 2027. Currently, those eligible for the new flat-rate state pension—introduced for individuals who reached state pension age after April 2016—will receive £12,547.60 next year, which is just below the threshold. Experts caution that many pensioners receive additional income from other pension schemes, leading to complexities in taxation.
Reeves has stated that for those whose only income is the state pension, the administrative burden of tax collection will be alleviated. In her remarks to Martin Lewis, founder of Money Saving Expert, she confirmed, “In this Parliament, they won’t have to pay the tax.”
Despite this promise, there are concerns that the policy may not be practical. Approximately three-quarters of pensioners already pay income tax due to supplementary income sources. This includes around 2.5 million pensioners under the pre-2016 system, who receive both a basic pension and a SERPS pension, thus incurring tax obligations.
Steve Webb, a partner at pension consulting firm LCP and former pensions minister, pointed out that individuals with small private pensions could still face taxation. He noted that workers earning the same amount as the state pension would be taxed, while pensioners would not, raising questions about fairness in treatment. “There is a real risk that pensioners on the new system will be more favourably treated,” Webb remarked, emphasizing the lack of detailed costing in the Budget documents.
The logistical aspects of this policy also pose challenges. Rachel Vahey, head of public policy at investment platform AJ Bell, highlighted that collecting small tax amounts from millions of pensioners could create significant administrative difficulties for the government. She remarked, “It’s no wonder they’ve put their tax collecting thinking caps on to find ways to avoid it, but we will have to wait and see what process they come up with and whether it will indeed make pensioners’ lives simpler.”
As the government navigates the complexities of pension taxation, the impact on older citizens remains a focal point. With the state pension’s anticipated rise above the tax threshold in April 2027, the effectiveness of this pledge will be closely monitored, particularly regarding its implications for pensioners across the United Kingdom.
