State pension tax: Experts warn John Healey's plan creates unfair two-tier pension system

Labour’s commitment to protect pensioners who rely entirely on the state pension from paying income tax has been criticised by pensions experts.

They warn it could create inequities between retirees with similar incomes.

Chancellor John Healey reaffirmed the pledge yesterday following concerns that the state pension could rise above the frozen income tax personal allowance from April next year.

The Treasury said: “Anyone whose only income is the full new or basic state pension without any increments will not pay income tax and we are committed to that over this parliament.”

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The promise was first made by former chancellor Rachel Reeves and will now be honoured under Andy Burnham’s Government.

However, experts say the policy could leave pensioners with modest private or workplace pension income paying tax, while those receiving only the state pension would not.

The issue has arisen because the state pension continues to rise under the triple lock while the personal allowance has remained frozen.

Under the triple lock, the state pension increases each year by the highest of earnings growth, inflation or 2.5 per cent.

For 2026–27, the full new state pension is worth £12,547 — just below the £12,570 personal allowance, which has been frozen since April 2021.

The previous Conservative Government extended the freeze until 2028, and Labour later extended it again until 2031.

The Tories had pledged to raise the personal allowance for pensioners in line with the triple lock had they won the 2024 General Election.

Sir Steve Webb, former pensions minister and now a partner at consultancy LCP, described Labour’s approach as a “very flawed sticking plaster”.

“This is incredibly difficult to implement and will create all sorts of cliff edges and unfairness,” he said.

He warned that pensioners need clarity ahead of the planned changes next April.

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“People are worried about paying tax for the first time,” he said, adding that the Treasury has yet to explain how the policy will work in practice.

Sir Steve argued that freezing the personal allowance created the problem, while the proposed solution only addresses it for a narrow group of pensioners.

This could mean retirees with modest private pension income paying tax despite having similar total incomes to those who qualify for the exemption.

He also warned the policy could create disparities between recipients of the old and new state pensions, as the full basic state pension is worth around £9,000 a year. “It’s a mess really,” he said.

Dennis Reed, director of campaign group Silver Voices, also criticised the proposal, calling it “a nonsense really”.

He said Mr Healey was simply restating what Rachel Reeves promised at the last budget and that Labour had not explained how the commitment would be implemented.

He argued that a pensioner receiving the lower basic state pension plus a modest private pension could still pay tax despite having the same income as someone receiving only the full new state pension.

“Which is completely unfair,” he said.

Widowers receiving a small widow’s pension could also be affected if that additional income pushes them above the threshold.

“Why should they be punished for that?” he said.

Mr Reed said his preferred solution would be to increase the personal allowance for all pensioners, regardless of where their retirement income comes from.

LCP estimates that exempting pensioners whose only income is the state pension would cost the Treasury around £72million in 2027–28, rising to £125million the following year and £180million by 2029–30.

No detailed policy has yet been published explaining how the Government intends to deliver the commitment.

Mr Reed also warned that implementing the proposal could create additional administrative costs.

“There will also be admin costs with this fiddling around as well rather than just resolving the whole problem,” he said.

Labour has not yet released further details on how the commitment will operate ahead of the changes due next April.

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