There are growing calls for an increase in the personal tax-free allowance for state pensioners under a potential Labour government led by Andy Burnham. Sir Steve Webb, the former pensions minister who played a key role in establishing the triple lock pension guarantee, has been at the forefront of these recommendations.
The concerns arise as the state pension, managed by the Department for Work and Pensions (DWP), is expected to rise above the £12,570 personal tax-free allowance starting next April. Recent wage growth figures suggest a possible 3.9 per cent increase in the state pension rate, which could mean some pensioners living solely on their state pension might begin to face tax liabilities for the first time.
In response, the government has pledged to protect these pensioners from incurring additional tax bills if the state pension constitutes their only income. However, Sir Steve Webb has proposed two potential solutions to address the situation.
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The first option involves raising the personal tax-free allowance specifically for all pensioners. This adjustment would ensure that, even with the increased state pension, those fully dependent on it would remain below the taxable income threshold. While this approach would alleviate tax concerns for such pensioners, it would also provide a financial benefit to all pensioners paying tax, numbering around 8.7 million individuals.
The alternative suggestion is to implement a write-off scheme for small tax bills affecting pensioners. Under this plan, HM Revenue and Customs (HMRC) could refrain from issuing tax demands for trivial amounts, sparing pensioners from undue financial and administrative burdens.
Sir Steve Webb elaborated on these options: “An across-the-board increase in the tax allowance for all pensioners, set so that the threshold exceeds the new state pension rate, could effectively resolve this political issue. However, this would entail considerable costs and benefit many pensioners who are already paying tax.”
He added, “Alternatively, writing off small tax bills for pensioners, particularly those dependent solely on the new state pension, would be a more cost-effective solution. This would specifically assist those most affected, avoid benefiting wealthier pensioners unnecessarily, eliminate discrepancies between old and new pension systems, and mitigate the risk of the ‘cliff edge’ effect where a small increase in income leads to the loss of concessions.”