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- Author, Kevin Peachey
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Some people are already paying income tax on their state pension, the report says, despite a Tory pledge to keep it tax-free.
The standard new state pension is currently below the £12,570 threshold above which income tax is payable, but future increases may take it above this level.
The Conservative manifesto includes a triple plus lock – a plan to increase the tax-free threshold so that the new state pension is not drawn into the income tax net.
But pensions consultancy LCP says the amount people already receive in the state pension varies and means some are already paying tax and will continue to pay.
This is due to the complexity and limitations in the current system.
Many people have been in touch asking for clarification on pension policies and some pointing out that some of their pension income is already taxed.
“Is the promise of tax exemption guaranteed?”
Alan from West Sussex asks: “Can you guarantee my pension will be triple locked and tax free?”
All the major parties have said they will maintain the triple lock – a commitment to increase the state pension each year by the highest wage, inflation or 2.5%.
With tax thresholds frozen for at least the next three years under the main parties’ plans, it raises the prospect that many people will be taxed if they only receive the state pension.
But the Conservatives said they would introduce a triple-plus lock, which would raise the threshold to prevent that from happening.
Almost 12 million people receive the State Pension and the standard rate is below the current tax-free threshold of £12,570.
However, LCP research suggests that 2.5 million people are already receiving more under the State Pension, meaning they are and will continue to be taxed.
The old state pension system – for those who reached pension age before 2016 – is complex, with some people receiving additional state pension money.
The subsequent new state pension system is designed around the standard rate.
But even in this system, some pensioners may receive more than the standard amount because of transitional measures to ensure that people who built up pensions under the old rules can keep their entitlements. About 300,000 people would get enough to be placed in an income tax bracket, the report said.
LCP partner Sir Steve Webb, who is a former Liberal Democrat pensions minister, said: “The reality is that the amounts that pensioners receive vary widely, from a few pounds a week to hundreds of pounds a week.
“We estimate that around 2.5 million pensioners, more than one in five of all pensioners, have state pensions above the income tax threshold. These pensioners would overwhelmingly remain taxpayers even if future policy combined the income tax relief with an increase in the total state pension rate”.
A Conservative Party spokesman said: “Under triple lock plus, the tax-free allowance for pensioners will increase in line with the fastest of prices, earnings or 2.5% – the same as the state pension.”
He said millions of pensioners would pay higher taxes under Labour.
Labor said the Tories’ plan was not credible.
“My work pension is taxed”
Rosie from Scotland said there is a perception that pensioners don’t pay tax, but “state pensions are taxable income and many on small working pensions are taxed because of the freeze on tax thresholds”.
Income tax caps will continue to be frozen for the next three years under plans by Labour, the Tories and the Lib Dems.
This means that as income increases, more people will pay more taxes.
This includes some pensioners who receive income from an occupational or private pension, on top of their state pension.