Plans to manage the taxation of state pensions have been branded "rushed and incoherent," with warnings that they could unfairly penalise retirees. The criticism follows Chancellor Rachel Reeves's commitment that pensioners living solely on the state pension will not be required to pay income tax on it during the current Parliament.
Chancellor's Pledge and the Looming Threshold
Last month, Chancellor Rachel Reeves explicitly ruled out taxing individuals whose only income is the state pension. "If you just have a state pension, you don't have any other pension, we are not going to make you fill a tax return. I make that commitment for this Parliament," she stated. She acknowledged that the full new state pension is projected to exceed the personal income tax allowance around 2027, creating a potential issue for millions.
"We are working on a solution, as we speak, to ensure that we're not going after tiny amounts of money," Reeves added, confirming that those relying solely on the state pension will not face a tax bill before 2029.
Experts Warn of Unfairness and Complexity
Despite the Chancellor's assurances, financial experts have raised significant concerns about the lack of detail and potential pitfalls in the government's approach. Maike Currie, Vice President of Personal Finance at PensionBee, highlighted the anxiety the situation has caused among pensioners.
"While the Chancellor has confirmed that until the end of Parliament in 2029 those with only the state pension won’t be taxed, saying that the government is working on a solution, there is very little detail on how this will work in practice, with many unanswered questions," Currie said.
She pointed to several critical issues that remain unresolved:
- Would a pensioner with just £1 of private pension income face tax, while a neighbour with the same total income from the state pension alone pays nothing?
- How will the rules affect those on the old state pension system, or recipients of SERPS (State Earnings-Related Pension Scheme) income, many of whom already pay tax via HMRC's Simple Assessment?
- The "thorny issue of fairness" where a worker earning £12,500 pays both tax and National Insurance, but a pensioner with the same income pays neither.
Risk of Deepening Generational Divides
Currie warned that the current proposals risk creating a messy and unjust system. "The Government’s intentions may be good, but the execution looks rushed and incoherent. As ever the devil is in the detail," she stated.
She cautioned that without a clear and fully costed plan, the policy could "deepen the generational divide" and create a tax system with "more complexity that rewards some pensioners while penalising others who’ve done the right thing and saved."
The expert concluded that the government risks replacing one problem—small tax bills for some pensioners—with a larger one: "a messy, unfair system full of exemptions, anomalies and hard-to-justify gaps." The Department for Work and Pensions (DWP) and HM Treasury are now under pressure to provide clarity on how the proposed solution will work in practice to avoid unintended consequences for retirees.
