Is State Pension Tax Reform Age Discrimination and Unfair?

The first point to understand before reading this article is that State Pensions form part of taxable income but are paid out gross to pensioners, with no deductions for income tax.

On 26^th November, Chancellor Rachel Reeves delivered her Autumn Budget and in it, she confirmed that from April 2027, where pensioners sole sources of income are from state pensions and they exceed the Personal Tax Allowance PTA  (£12,570), where income tax would be due, a simplification of HMRC’s Simple Assessment (a simplified and automated self assessment tax return) would be adjusted to mean no income taxes will need to be paid by consumers on State Pensions that exceed the PTA.

But, if you have other sources of income such as interest and other pensions, the tax due under any Simple Assessment, including excess State Pensions, will still be payable.

The Low Incomes Tax Reform Group (LITRG) has this week urged the Chancellor to clarify plan to exempt some pensioners from income tax.  The argument:

• A pensioner on state pension income only of say £13,000 pa (e.g., if state pensions increase again in 2027 to £13,000 or if your old-style Basic State Pensions and Additional State Pension exceeds the PTA), you will not have to refund tax/pay tax.
• A pensioner with say state pension income of £10,000 pa plus a private pension income of £3,000 pa, i.e., still £13,000 pa taxable income in total, will have to pay income taxes on the excess over the PTA, i.e., £13,000 less £12,570 = £430 taxable at 20%.
• This is argued as not fair.

Comment

We agree with the LITRG’s sentiment i.e., consumers yet again get penalised for saving in private pensions if they have a shortfall in state pensions, but we would add that this is also age discrimination in its purest form.

Why should a person aged 67 with state pension income only of £13,000 pay no income taxes but ...

• A 67 year old that was ‘contracted out’ of SERPS when working  but now retired with an old style Basic State Pension of £9,614 pa but with no Additional State Pension (as they were contracted out) but with a Guaranteed Minimum Pension (GMP) from contracting out company pension of £3,386 pa (total £13,000 pa) pay income tax on any excess over PTA.
• A 65 year that is still working and earning £13,000 pa pay income tax? 
• A 20 year old, studying to better themselves with an apprenticeship earning £13,000 pa pay income tax?

This is indirect age discrimination in that you can only get tax waived if you are drawing state pension only as well as yet again rewarding people that have not saved for there future wellbeing.  It also penalised those that were contracted out of SERPS through no fault of their own via a company pension scheme.

We argued that the easiest and fairest solution for all was to increase the PTA in line with State Pension increases or offer an addition ‘age allowance’ on top of the PTA for all people over age 65.  This would not have solved the problem for all but would not penalise those pensioners with private pension income to supplement any shortfall in state pension credits.