Managing state pensions is a very complex and long-term issue. Policy decisions can affect peoples’ income seventy or more years later, when the politicians who made them are long gone. And mistakes can have a devastating effect on the quality of life in retirement for thousands or even millions of people. We have seen the results in the treatment of the ‘WASPI’ women born in the 1950s, who found themselves unexpectedly deprived of pensions they were expecting at 60. It looks as if the government is making another blunder. Another pensioners tax bombshell will not help their electoral chances.
Two policy decisions
The ‘triple lock’ policy was introduced in 2010 to protect pensioners’ incomes. Under this policy, the State Pension increases each year by the largest of 2.5%, the Consumer Price Index or average earnings. The inflation figure is always measured in September, and this year it was unusually high. As a result the state pension will rise by 8.5% next spring.
But at the same time, the government has decided to freeze income tax thresholds next year. That means that anyone with an income of more than £242 a week, or £12,570 a year, will be liable for tax. The Institute for Fiscal Studies estimates that the freeze will generate £50 billion for the government, with the burden falling disproportionately on people on relatively low incomes, including many pensioners.
At present, state pensioners pay no tax
Until now, the state pension has always been less than the income tax threshold, so people whose only income is the state pension have never had to pay tax. The only pensioners liable for tax are those who also have private or employer pensions, or other earnings. And because that tax is normally deducted from those other earnings before the payment is made, through PAYE (Pay As You Earn), people can be confident about the income they have to live on, and need not fear unexpected tax bills. But for many, this is about to change.
A bill out of the blue for 2 million
The basic state pension is likely to remain below the income tax threshold. But many pensioners born before April 1953 (for women) or 1951 (for men) also receive SERPS ‘top up’ state pensions, which can add up to £200 a week to the basic rate. Official figures suggest that there may be over 2 million of them. They have not previously paid income tax on their state pensions. But from next April, that additional income will take them above the income tax threshold for the first time.
HM Revenue and Customs, who assess and collect tax, have not collected tax from these people in the past. And they have never had a system for making PAYE deductions from the state pension. So it is likely that people affected will only know about the change when they receive a demand for tax from HMRC at the end of the tax year, in April 2025. But by then many will have spent the money, unaware that a tax bill was on its way. This will come as a shock, and make life hard for some. They will have until the following January to make the payment, but completing the self-assessment form will be a challenge for some, and not all will get it right.
Does the government really want to do this to its supporters?
A Treasury spokesman has said “The best tax cut we can provide right now is to halve inflation, which we’re on track to do this year as long as we stick to our plan.” Support for the Conservative Party has always depended heavily on older voters. Whether they will thank this government for these changes, and the apparent lack of planning, remains to be seen.