Some already pay tax on state pension, reports suggests
9 hours ago
By Kevin Peachey, Cost of living correspondent
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Some people already pay income tax on their state pension, a report suggests, despite a Conservative pledge that it will stay tax-free.
The standard new state pension is currently below the threshold of £12,570 after which income tax is paid, but future rises may bring it above that level.
The Conservative manifesto includes the triple lock plus – a plan to raise the tax-free threshold so the new state pension is not dragged into the income tax net.
However, pensions consultancy LCP says the amount people already receive in the state pension varies and means some already pay, and would continue to pay, tax on it.
That is the result of complexities and allowances in the current system.
Taxation of pensions is a key issue raised by voters through the BBC’s Your Voice, Your Vote project.
Many people have been in touch asking for clarity on pensions policies, with some pointing out that some of their pension income is already taxed.
‘Is the tax-free promise guaranteed?’
Alan, from West Sussex, asks: “Can you guarantee my pension will be subject to the triple lock and free of tax?”
All the major parties have said they would maintain the triple lock – a pledge to increase the state pension each year by the highest of wages, inflation or 2.5%.
With tax thresholds frozen for at least the next three years, under the main parties’ plans, this raises the prospect of many people being taxed if they solely received the state pension.
However, the Conservatives have said they would introduce the triple lock plus, which would increase the threshold to ensure this would not happen.
Nearly 12 million people receive the state pension and the standard rate is below the current £12,570 tax-free threshold.
However, the research by LCP suggests that 2.5 million people already receive more under the state pension system which means they are, and would continue to be, taxed.
The old state pension system – for those who reached pension age before 2016 – is complex, with some people also receiving additional state pension money.
The subsequent new state pension system is designed around a standard rate.
But even under this system, some pensioners may receive more than the standard amount, due to transitional measures ensuring that people who had built up pensions under the old rules could retain their entitlements. About 300,000 people would receive enough to take them into the income tax bracket, the report said.
LCP partner Sir Steve Webb, who is a former Liberal Democrat pensions minister, said: “The reality is that the amounts which pensioners receive vary hugely, from a few pounds a week to hundreds of pounds a week.
“We estimate that around 2.5 million pensioners, or more than one in five of all pensioners, have state pensions in excess of the income tax threshold. These pensioners would overwhelmingly continue to be taxpayers even if future policy linked the income tax allowance to increases in the headline rate of state pension.”
A Conservative Party spokesman said: “Under the triple lock plus, the tax-free allowance for pensioners will rise in line with the fastest of prices, earnings or 2.5% – just like the state pension.”
He said that under Labour, millions of pensioners would pay more tax.
Labour has said the Conservative plan is not credible.
‘My work pension is taxed’
Rosie, from Scotland, said there was an impression pensioners do not pay tax, but “state pensions are taxable income and many with tiny work pensions are taxed due to the freezing of tax thresholds”.
Income tax thresholds will continue to be frozen for the next three years, under plans from Labour, the Conservatives and the Liberal Democrats.
That means more people will be drawn into paying more tax as their income increases.
That includes some pensioners who receive income from a workplace or private pension, on top of their state pension income.
