Healey is expected to shield low-income pensioners from income tax – but how will it work?
Retirees will get a personal allowance aligned with the new state pension, but experts say it could get complicated Retirees in the UK on low incomes are expected to be given a new
By The Guardian
Low-income pensioners are expected to be protected from paying income tax on their state pension under plans due to be announced by Chancellor John Healey in the Budget on Wednesday.
The full new state pension is expected to rise by 3.9% from April, taking it to £13,036.40 a year, or £250.70 a week. That would put it above the current personal allowance of £12,570, the level at which income tax starts to apply.
The government has already promised that people whose only income is the state pension will not be taxed on it. The expected solution is a separate personal allowance for low-income pensioners, set at the same level as the new state pension.
The allowance is expected to rise in line with the state pension until the end of the current parliament. The measure could help about one million pensioners and is estimated to cost around £200m a year by 2030.
State pension payments are made without income tax being deducted at source. HMRC normally considers the pension alongside any other taxable income when deciding whether tax is due.
The proposed protection is intended for people on low incomes, particularly those receiving only the full new state pension. Pensioners with other income could still have to pay tax if their total income exceeds the relevant allowance.
Experts have raised concerns about how the system would work in practice. If eligibility depended on receiving exactly the state pension, someone with a small amount of additional taxable income could potentially lose the protection and face a higher tax bill.
The Treasury is expected to provide the eligibility rules and explain how the allowance will be applied when Healey delivers the Budget on 28 October. The pension increase itself is due to take effect in April.