Sir Steve said: “From 2027 onwards, someone with just the new state pension and no other income will start getting annual tax bills from HMRC. This is politically embarrassing for the Government, but the proposed solution is deeply flawed.
“It discriminates against those on the old state pension system, even if they have identical income to someone on the new system, and creates unwelcome ‘cliff edges’ for those who have even a pound of other income.
“It is also clearly a temporary sticking plaster solution for a problem that will have to be addressed at some point.”
The £1 cliff edge
Under the policy, someone living on the state pension alone would not pay tax. However, if they drew even £1 in extra income, they would not only pay tax on that, but on the portion of their state pension above the tax-free threshold as well.
By 2029-30, LCP estimated the state pension could hit £13,671 – meaning £1 of extra income could generate a tax bill of £220.
According to Telegraph analysis of the figures, someone with a full state pension and a £1,000-a-year private pension would hand HMRC £420 – an effective tax rate of 42pc on their private pension.
Helen Morrissey, of Hargreaves Lansdown, said: “This change will relieve the admin burden on some pensioners, who may have suddenly had to fill in a simple assessment form for the first time.
“However, it will be seen as hugely unfair by others who may have struggled to save into a small pension and now face paying tax.
“Every penny counts when you are on a lower income and they might find themselves looking at those on a similar income, who don’t pay any tax, and asking ‘what’s the point in saving into a pension?’”
Cost to the taxpayer
If LCP’s estimate proves to be correct and the new state pension hits £13,671 by 2029, the Chancellor’s plan would hand eligible retirees a £220 tax write-off – costing more than £170m a year in lost revenue.
Sir Steve warned that future governments might struggle to reverse the measure, as has been the case with the triple lock.
He added: “It may be reasonably easy to defend not collecting £88 in tax from relatively low-income pensioners in year one. But if this policy continued into the next Parliament, it would get more and more expensive with every passing year and be very hard to switch off, like the triple lock.
“As the years go by, the Government would be writing off hundreds of pounds per eligible pensioner, increasing the disparity between them and others struggling by on a modest income.
“This also comes at a growing cost to the taxpayer.”
In the run-up to the 2024 general election, the Conservatives announced that the tax-free allowance would rise with the triple lock, meaning retirees would never pay tax on their state pension.
However, the policy, known as “triple lock plus”, was not adopted by the incoming Labour Government.
The Treasury declined to comment on the figures and said it would set out more details in due course.