The state pension has always been deemed a contributory benefit, no different to a contributory occupational pension, and has always been taxable.
The fiscal drag created by Rishi Sunak from 2021, extended by Jeremy Hunt to 2028 and now extended by Rachel Reeves to 2030 will see anyone with taxable income exceeding £12,570 dragged into the tax net.
Anyone with only state pension in excess of that amount is already caught in the net and pays tax through Simple Assessment.
The average state pension paid per week is around £220 pw but many have state pension considerably higher than that especially those who were not in works pensions schemes and/or not contracted out of SERPS or have inherited SP from a late spouse. It is possible to have a SP plus Additional State Pension of almost £400 pw.
This latest vague policy, not to tax people whose only income is no more than the rate of the full new SP is only an idea, the workings of which are still to be formulated.
It would be fraught with cliff-edge anomalies and unfairness (similar to last year’s withdrawal of univeral WFP) not least to those who worked the requisite number of years to get a full pension (currently 35) but have no other income compared to those who didn’t and claim Pension Credit to top up - which is not taxable. At the moment, the latter ends up better off through the gateway benefits Pension Credit gives.
High inflation since 2022 and the triple lock have caused this situation.
Had Sunak not shelved the Labour Rooker Wise amendment which had been in force since 1977 and increased the tax personal allowance by the rate of the RPI each year, the TPA would now be £16,600 and rising to £17,300 in April 2026.
Sunak’s policy, continued by his successors, means a basic rate taxpayer whose income has only increased by the rate of inflation is now paying around £950 a year more tax than they would have been had he left Rooker Wise in place.
There used to be an additional tax personal allowance called the Age Allowance which George Osborne abolished in the 2012 Budget. The simplest and fairest thing (imo) would be to reintroduce that so that each year’s tax personal allowance and age allowance combined would equal the annual rate of the full new state pension. As the Budget takes place after the inflation numbers which form the following April’s triple lock pension rise are announced, it would be easy to do in order to avoid the administrative burden of Simple Assessment.
