Rachel Reeves' Treasury new response ordered to calls to make the state pension tax free (Image: Getty)
Calls have been growing for the government to exempt the state pension from tax as older people grapple with the increased cost of living. This year Chancellor Rachel Reeves has reinstated the winter fuel payment of up to ￡300 for around nine million pensioners.
However not everyone will get it - and a threshold for taxable earnings has been set at ￡35,000. A petition on the parliament website is calling for the state pension to be exempt from tax - and not count towards people paying money to the government. It has reached 17,000 signatures and got a response from the Treasury.
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The petiton says: “We want the government to make the state pension tax exempt and not impact the tax threshold. We think it is wrong to tax the state pension.”
Rachel Reeves’ Treasury gave a short response - but now the influential Petitions Commons Select Committee has decided this response is inadequate and ordered officials to come back with a more comprehensive answer to the questions raised.
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The Committee said: “The Petitions Committee (the group of MPs who oversee the petitions system) has considered the Government’s response to this petition. They felt the response did not respond directly to the request of the petition. They have therefore asked the Government to provide a revised response. When the Committee receives a revised response from the Government, we will publish this and share it with you.”
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The original Treasury response said: “Exempting the State Pension from income tax would be expensive and add complexity to the tax system. Exempting the State Pension from income tax would be expensive at a time when the Government has inherited a very challenging set of fiscal circumstances.
"Individuals earning above the higher rate threshold would benefit more than those with incomes below, and those earning below the Personal Allowance would not benefit at all. The Government keeps all taxes under review as part of the policy making process. The Chancellor will announce any changes to the tax system at fiscal events in the usual way.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, warns more pensioners will be ‘dragged into taxpaying territory’ over the coming years due to frozen income thresholds.
Ms Morrissey explained: “The pension tax paying population is surging. On the one hand, this can be celebrated as a sign of rising incomes among this population, but it’s also fair to say that frozen tax thresholds have also played a huge part in dragging more pensioners into taxpaying territory. With the freeze set to stay in place until 2028, we expect to see these numbers continue to swell.
“There are things that can be done to help manage these tax liabilities. For a start, up to 25 per cent of your pension can be taken tax free and this can be used alongside taxable income to keep you below an income tax threshold. Retirement income is also more than just about pensions, with ISAs also able to play a key role.
“Paying into a pension reduces your adjusted income and this can reduce the amount of tax you have to pay or even stop you from breaching a threshold that moves you into paying tax at a higher rate. This can be especially helpful to those who earn between ￡100,000 and ￡125,140 per year who get hit by the stealthy 60 per cent tax trap that erodes your personal allowance.”
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Under the Triple Lock policy, the New and Basic State Pensions increase each year in-line with whichever is the highest between the average annual earnings growth from May to July, CPI in the year to September, or 2.5 per cent. It is aimed at preventing the value of the State Pensions being whittled away by cost of living pressures.
The New and Basic State Pensions increased by 4.1 per cent in April, however, future forecasts from the Labour Government expect it to rise by 2.5 per cent over the next four financial years. Using these calculations, it puts the full New State Pension on track to be worth ￡12,578.80 in the 2027/28 financial year - ￡78.80 over the Personal Allowance.
To view the petition, click here.
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