Winter fuel payment U-turn: how will Labour balance the books?

Times

3 days ago

Next week Rachel Reeves will unveil one of the government's biggest U-turns so far — reinstating winter fuel payments for millions of pensioners.
Scrapping them is widely seen as one of the chancellor's biggest mistakes, and the government hopes the change of tack will help stem the pubic backlash over it. But the reinstatement will not be universal — there will be clear winners and losers — and the decision to claw back money from richer households through the tax system is likely to be controversial.
Why is the government changing course?
In one her first acts as chancellor, Reeves made an unexpected announcement. In July last year she scrapped winter fuel payments for ten million pensioners. She argued that the policy was a matter of necessity. The economic inheritance was so dire that the payments, worth between £200 and £300, were unaffordable.
In doing so she made a moral and fiscal case. It was fundamentally wrong, she said, for wealthier households — including millionaires — to get the payments. At the same time she said that the £1.5 billion saved from the policy was necessary to balance the books and repair the public finances. Only those in receipt of pensions credit — those with an income of £11,500 — were entitled to the payments.
The move was politically disastrous and contributed to Labour's collapse in the polls, which suggested it had endured the worst start of any government in history. There was a widespread backlash in both the cabinet and among Labour MPs. During the local elections the scale of the problem became tangible — voters repeatedly raised the issue on the doorstep — and Sir Keir Starmer decided he had no choice but to change course. After weeks of denials and obfuscation he announced that he would make a partial U-turn.
What is the new policy?
After Starmer announced a U-turn last month, Reeves said she would set out a new 'means test' at her spending review next week. Ministers say this is designed to protect pensioners on lower incomes without giving 'payments to millionaires'.
The Times understands this will focus on restoring payments to the lower-income half by setting a new threshold based on average household disposable income, which is about £37,000. However, to implement the change, payments will have to be restored to all pensioners and then reclaimed from the better off through the tax system.
How will this affect my tax bill?
If you are a pensioner with an income above the new threshold, you are likely to get a payment this winter, which will then be clawed back by HM Revenue & Customs next year. This could come through self-assessment for those who complete a tax return, while others will see their tax code adjusted so they pay about £17-£25 more tax every month next year.
Does this mean more power or data for HMRC?
No — it relies on existing data sharing arrangements between HMRC and the Department for Work and Pensions. Child benefit is already clawed back from higher earners in a similar way through tax, and the taxman is attempting to simplify systems so that a 'reconciliation' happens automatically at the end of the tax year in April without the need to fill in tax returns.
What if my partner is eligible for winter fuel payments and I'm not?
One of the messy aspects of the new policy is that tax is paid by individuals but winter fuel payments are given on a household basis — a pensioner couple only gets one payment. In theory, a high-earning pensioner might be required to pay higher tax because their lower-earning partner gets a winter fuel payment, but it is unclear how HMRC will know when to apply this. Similarly, two higher-earning pensioners should not be taxed twice, but it's not clear that HMRC has robust records of household income.
What if someone dies after receiving a winter fuel payment but before a tax bill?
It is likely that their estate will have to repay the money. It is normal practice for executors to settle outstanding tax bills for people who die during a financial year, and an extra £300 is likely to be marginal for many higher earners. But the appearance of taxing dead pensioners may have outsize political impact.
How much does the government save?
Restoring payments to the poorer half of pensioners would cost about £750 million, half the amount saved by the original cut. This is far more expensive than an alternative option of expanding eligibility to pensioners on other benefits, which would cost about £300 million and give 1.3 million back their payments.
However, a campaign to improve uptake of pension credit has led to more pensioners claiming, at a cost of £200 million — which will remain even if more pensioners get their payments back. It may well be that after all the political pain of the original policy and a protracted U-turn, Reeves only has a net saving of half a billion left to show for it.
Will this revive Starmer's fortunes?
The government's decision to broaden eligibility for winter fuel payments is unsurprisingly popular. However, critics question the approach given that Labour has already taken the hit for removing the universal payment in the first place. How much will voters thank Starmer for reinstating the payments to some voters?
When payments are clawed back from wealthier pensioners next year, it is likely to be depicted by opponents as a stealth tax. Perhaps the biggest benefit for Starmer will come in the form of managing his party. With challenging votes on welfare and difficult decisions to come in the Budget, the prime minister needs to do all he can to keep his backbenchers in line.