Concerns Arise Over Tax on State Pensions Despite Conservative Pledges

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A recent report suggests that some pensioners are already paying income tax on their state pensions, contradicting the Conservative Party’s pledge to keep these pensions tax-free.

The standard new state pension is currently below the £12,570 income tax threshold, but future increases could push it above this limit.

The Conservative manifesto includes the “triple lock plus,” a commitment to raise the tax-free threshold to prevent the new state pension from being taxed. However, pensions consultancy LCP has highlighted that due to variations in the amounts received, some individuals are already subject to tax on their state pensions.

Many individuals have expressed confusion over pensions policies, with some noting that a portion of their pension income is already taxed. Alan from West Sussex questioned whether the tax-free promise on pensions is guaranteed, reflecting broader public concern.

Variability in Pension Payments

The report by LCP reveals that the current system’s complexities mean that approximately 2.5 million people are already taxed on their state pensions. This is partly due to the old state pension system, which includes additional state pension money for those who reached pension age before 2016. Even under the new state pension system, some pensioners receive more than the standard rate due to transitional measures preserving their entitlements.

Sir Steve Webb, LCP partner and former Liberal Democrat pensions minister, stated, “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.”

Political Reactions

A Conservative Party spokesman reiterated the party’s commitment: “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.” The spokesman criticised Labour, suggesting their plans would result in higher taxes for millions of pensioners. Labour, however, has dismissed the Conservative plan as not credible.

Impact of Frozen Tax Thresholds

Rosie from Scotland highlighted a common misconception: “There is 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.” With income tax thresholds frozen for the next three years under the plans of all major parties, more pensioners are likely to be drawn into paying tax as their incomes rise.

This includes pensioners receiving income from workplace or private pensions in addition to their state pensions, further complicating their tax liabilities. The ongoing freeze on tax thresholds means that the issue of pension taxation is set to persist, affecting a significant number of retirees across the country.