Rachel Reeves opens tax ‘can of worms’ – basic state pensioners seethe | Personal Finance | Finance

Rachel Reeves has made a pledge to pensioners, pledging that those whose sole income comes from the state pension won’t have to pay income tax on it this Parliament. The move was announced in last week’s Budget to fix a looming problem, that the new state pension will soon exceed the £12,570 personal allowance. Unfortunately, I don’t think she’s thought it through, and neither do Express readers.

I’ve just received a letter from one saying Reeves has just opened a “can of worms”, and in my view, they’re correct. Things could turn very nasty indeed.

From April next year, those receiving the maximum new state pension will get £12,548, a mere £22 short of the allowance. A tiny bit of extra income would push them into tax territory.

From April 2027, the new state pension itself will rise above the allowance, regardlesss of whether the triple lock increases by earnings, inflation or the 2.5% backstop.

This would have meant that pensioners would have had to pay tax on the new state pension, even if they had no other income.

Reeves insists she’s fixing the issue by excusing them from income tax altogether. but her solution threatens to spark chaos, outrage and resentment, which is kind of typical of her.

The Chancellor said that retirees who rely solely on the new state pension won’t need to file a self-assessment return or pay income tax until at least 2028.

But this isn’t as simple as Reeves suggests. She might soon regret that pledge.

This is the first time ever the state pension has climbed above the personal allowance, which means we’re entering uncharted territory. With Reeves as the pilot, anything that can go wrong, almost certainly will. Like this.

Pension expert Maike Currie at PensionBee warns that sparing a select group low income pensioners from paying tax could look unfair. “Would someone with just £1 of private income face tax, when their neighbour on the same income from the state pension pays nothing?”

There’s an even stickier issue. So far, Reeves has only talked about the new state pension. She hasn’t mentioned the old basic state pension, paid to those who retired before April 6, 2016.

This remains well below the personal allowance, but millions get it topped up by additional state pension such as SERPS or S2P, often by thousands of pounds.

As a result, some 2.5million basic state pensioners pay income tax on the state pension, via simple assessment. Many won’t have other sources of income, but pay anyway because they’re above the personal allowance.

Will they be included in Reeves’s exemption plan? If so, it could cost the Treasury a lot of money. If not, it will create a glaring inequality. Older pensioners will be seething.

Currie labelled the Treasury’s plan “rushed and incoherent,” warning it risks rewarding some pensioners while penalising others.

She said Reeves risks creating “a messy, unfair system full of exemptions, anomalies and hard-to-justify gaps.”

The Express reader suggested it would break age discrimination laws too. Oh dear. It’s yet another nightmare in the making. Does the Chancellor know what she’s doing here? On past form, no.