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As the state pension creeps every closer to crossing the personal allowance tax threshold, the Government has been asked about increasing the tax-free limit.
Conservative MP Sir Ashley Fox asked ministers if they had looked at the idea of raising the personal allowance “in line with the state pension”.
The personal allowance currently allows a person to earn £12,570 a year without paying income tax, but the full new state pension is now £230.25 a week, or £11,973 a year, just £600 away from attracting a tax bill.
Treasury minister James Murray provided a response. He said: “The Personal Allowance – the amount an individual can earn before paying tax – will continue to exceed the basic and full new state pension this tax year.
“This means pensioners whose sole income is the full new state pension or basic state pension without any increments will not pay any income tax.”
However, he did point to an upcoming policy change. The minister said: “The previous Government made the decision to freeze the income tax Personal Allowance at its current level of £12,570 until April 2028.
“This Government is committed to keeping people’s taxes as low as possible while ensuring fiscal responsibility and so, at our first Budget, we decided not to extend the freeze on personal tax thresholds.”
The Tories previously put forward a policy idea to tackle this, proposing a ‘triple lock plus’ policy during their General Election campaign last year.
This would mean the triple lock metric being used to increase the personal allowance for pensioners each year, as well as the increase in state pension payments, meaning the state pension would always be below the tax threshold.
The triple lock guarantees state pension rates go up in line with the highest of 2.5%, inflation or the rise in average earnings.
Experts have warned that the state pension becoming subject to income tax could have major consequences for some pensioners who claim other benefits.
Rebecca Lamb, external relations manager at Money Wellness, warned: “Many people understandably assume that a small rise in their pension is a good thing.
“But if it pushes them just over the personal tax allowance, it won’t just mean paying a bit of income tax – it could disqualify them from Pension Credit, which in turn opens the door to a much larger loss.
“Pension Credit acts as a gateway to a wide range of help: Housing Benefit, Council Tax Reduction, free NHS dental and eye care, the Warm Home Discount, Cold Weather Payments, and even the free TV licence for over-75s.
“In total, someone could end up losing more than £8,000 a year in support, all because their pension creeps just above the threshold.”
