Older retirees who began receiving their state pension before April 6, 2016, are set to miss out on the latest tax relief promised by Labour Party Chancellor Rachel Reeves. The government has pledged to exempt state pensions from income tax as pension payments edge above the £12,570 personal tax-free allowance.
From April next year, the new state pension will increase by at least 2.5%, pushing it beyond the current personal allowance threshold and potentially triggering millions of new tax bills. Although Chancellor Reeves announced last year that retirees solely relying on the state pension would not pay income tax, this benefit will cover just 800,000 of the 13.2 million state pensioners in the UK.
Research by consultancy LCP reveals that pensioners who retired before April 6, 2016, receiving the “old” state pension, will be excluded from this exemption. Sir Steve Webb, a former pensions minister and now with LCP, criticized the policy as a “sticking plaster” that unfairly discriminates against older pensioners, even when their income levels match those receiving the newer pension. He highlighted that from 2027 onward, pensioners with only the new state pension and no other income will likely begin receiving tax bills, creating problematic “cliff edges” for those with minimal additional income.
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Helen Morrissey of Hargreaves Lansdown added that although the change may reduce administrative burdens for some, it could feel unjust to pensioners who spent years saving into a small pension but now face tax charges. She warned this could discourage saving, as pensioners see others with similar incomes paying no tax on their state pension.
The government faces mounting pressure to address these disparities and develop a more inclusive, long-term solution for pensioner tax fairness.