Image source, Getty Images
- Author, Kevin Peachey
- Role, Cost of Living Correspondent
Some people are already paying income tax on their state pension, a report has found, despite a Conservative promise that it will remain tax-free.
The standard new state pension is currently below the £12,570 threshold after which income tax is paid, but future increases could take it above that level.
The Conservative manifesto includes the triple lock plus – a plan to increase the tax-free threshold so that the new state pension does not end up in the income tax net.
However, pension consultancy LCP says the amount people already receive in the state pension varies, meaning some are already paying tax on it and will continue to do so.
This is the result of the complexity and margin in the current system.
Many people have been in touch asking for clarity on pension policies, with some pointing out that part of their pension income has already been taxed.
“Is the tax-free promise guaranteed?”
Alan, from West Sussex, asks: “Can you guarantee that my pension will be triple lock and tax free?”
All major parties have said they will maintain the triple lock – a promise to increase the state pension by the highest wages, inflation or 2.5% each year.
With tax thresholds frozen for at least the next three years under the main parties’ plans, this raises the prospect of many people paying tax if they receive only the state pension.
However, the Conservatives have said they would introduce the triple lock plus, raising the threshold to ensure this does not happen.
Nearly 12 million people receive the state pension and the standard rate is below the current tax-free threshold of £12,570.
However, LCP’s research shows that 2.5 million people already receive more under the state pension system, meaning they are and will continue to be taxed.
The old AOW system – for those who reached retirement age before 2016 – is complex, with some people also receiving extra AOW money.
The subsequent new state pension system is designed around a standard rate.
But even under this system, some pensioners can receive more than the standard amount, thanks to transitional measures that ensure that people who had built up a pension under the old rules could keep their rights. About 300,000 people would receive enough to meet their income tax bill, the report said.
LCP partner Sir Steve Webb, a former Liberal Democrat pensions minister, said: “The reality is that the amounts pensioners receive vary enormously, from a few pounds a week to hundreds of pounds a week.
“We estimate that around 2.5 million retirees, or more than one in five of all retirees, have a state pension in excess of the income tax threshold. These retirees would overwhelmingly remain taxpayers even if future policy were to tie the income tax deduction to income tax increases. the nominal rate of the state pension.”
A Conservative Party spokesperson said: “Under the triple lock plus, the tax-free allowance for pensioners will rise in line with the highest prices, income or 2.5% – just like the state pension.”
He said that under Labour, millions of pensioners would pay more tax.
Labor has said the Conservative plan is not credible.
‘My work pension is being taxed’
Rosie from Scotland said there was a perception that pensioners do not pay tax, but “state pensions are taxable income and many are left with small workplace pensions due to the freeze on tax thresholds”.
Income tax thresholds will remain frozen for the next three years, under plans from Labour, the Conservatives and the Liberal Democrats.
That means more people are incentivized to pay more taxes as their incomes rise.
This also applies to some retirees who receive income from a work or private pension, on top of their state pension income.