Labour refuses to shield state pension from ‘retirement tax'
The Treasury said the tax-free personal allowance would not be raised for retirees – a move campaigners have called a 'betrayal' of the elderly.
Millions of Britain's poorest retirees face being dragged into the tax net when the state pension breaches the £12,570 tax-free threshold in a move which has been dubbed the 'retirement tax'.
Rachel Reeves, the Chancellor, has committed to keeping income tax thresholds frozen until at least 2028, a policy introduced under the Tories. Last week she refused to rule out extending the freeze beyond this date.
However, the new 'full' state pension of £11,973 a year, paid to 12.9 million people aged 66 and over, is set to breach as early as next year.
The triple lock ensures that the state pension rises each April by the highest of inflation, average earnings or 2.5pc. If average earnings continue to grow at their current rate of 5.2pc, then the state pension will exceed the tax-free allowance for the first time next year.
This will mean pensioners – many of whom rely solely on the state pension for their income – will be taxed at 20pc on the portion above £12,570.
In March, the Silver Voices campaign group submitted a petition with 125,000 signatures to Number 10 and the Chancellor calling on the Government to lift the personal allowance threshold for pensioners and to commit to raising it in line with future triple lock rises.
However, the Treasury last week rejected the idea of 'exempting the state pension and other benefits' from income tax as doing so would 'add complexity to the tax system'.
Dennis Reed, director of Silver Voices, said the 'inadequate' response had 'stuck two fingers up' at pensioners who felt 'insulted and betrayed' by the Government.
He added: 'The British state pension isn't a king's ransom and it's very difficult to survive on at the moment, even without getting taxed on it.
'Keeping thresholds frozen is a backhanded way of taxing the state pension and triple lock, which is often people's only source of income.
'Extending the freeze to 2030 will make the situation even worse.'
The threshold freeze helped to push an extra 2.5 million pensioners into the tax net under the Tories' 14 years in power.
Ahead of the general election last year, the Conservatives proposed raising the personal allowance in line with the triple lock for pensioners to shield them from a 'retirement tax'.
Analysis by wealth manager Quilter suggests that an extra one million low-income pensioners would be taxed on their state pension if Labour were to extend the freeze until 2030.
'Giving with one hand and taking with the other'
Baroness Altmann, a former Tory pensions minister, said: 'Inevitably, if the state pension keeps going up and the threshold doesn't, more and more pensioners are going to pass the threshold with their state pension income alone.
'Those with no other income are increasingly going to find that the Government is giving with one hand and taking with the other. There's likely to be a lot of upset.
'Also, if you only have the state pension, an increase is only going to take you slightly over the threshold by a few pounds, the cost of administering it could well be more than the amount of tax they will collect.'
It comes as the former Labour leader Lord Kinnock said the Party is 'willing to explore' a new wealth tax of 2pc on assets over £10m.
In its response to the campaign, a Treasury spokesman said: 'Exempting the state pension and other benefits from income tax would add complexity to the tax system and those paying higher rates of tax would receive the greatest benefit.
'Individuals earning above the higher rate threshold would benefit more than those with incomes below, and those earning below the personal allowance would not benefit at all.
'It would also be expensive at a time when the Government has inherited a very challenging set of fiscal circumstances.'
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