Thabhani Sithole and Jan Smalley are two pensioners who are concerned about what the future holds
Rachel Reeves is expected to keep income tax thresholds frozen in next week’s Budget in a bid to rake in more money for the Treasury – a move that risks leaving large numbers of state pensioners paying income tax for the first time.
The Institute of Fiscal Studies (IFS) has warned that, without an exemption in place, millions of pensioners on low incomes will be forced to pay tax on their state pension from 2027.
Thabhani Sithole, 76, is one such pensioner concerned, saying it “worries her a lot”.
Thabhani, who lives in London with her daughter, receives £425 from the state pension each month and also receives £208 in pension credit each week and £295 a month for attendance allowance.
She worked part-time as a critical care nurse via agencies in hospitals for 22 years, before retiring for health reasons. She joined modelling agencies and was paid well for the work. However, once Covid-19 hit, Thabhani’s finances and health deteriorated as all her work dried up.
She told The i Paper: “The prospect of having to pay income tax on my pension worries me. I would have income tax to deal with, as well as my shared ownership mortgage, groceries and bills. They should increase the tax thresholds for pensioners.”
Thabhani already struggles with her finances and high living costs. She had a small private work pension which she soon used up after retiring, meaning she relies heavily on the state pension.
“I am already going from supermarket to supermarket searching for the cheapest groceries and can’t go on lots of holidays. I would have to cut my spending further if I had to pay income tax on my state pension.
“I’m not ashamed to say that I am struggling, even though I am doing better than before.”
‘I live in fear of what the Chancellor has in store’
Jan Smalley, 76, lives in Hampshire, with her husband Ian, 75. She, too, is concerned about having her state pension taxed.
She worked at BT for 25 years before being made redundant. After a spell working at various training organisations, Jan found employment as an agency temp at the Home Office.
Jan fully retired at the age of 70 when Covid-19 struck, but she started to receive her state pension in 2009 which is around £1,000 per month.
She wants the Government to ensure that pensioners do not have to pay any tax on their state pension and also believes pensioners should not be forced to pay national insurance contributions.
She said: “If the Chancellor will not consider these policies, then she should set an automatic personal allowance increase of at least 10 per cent per year.”
Jan is concerned about what Reeves has in store and said she “lives in fear” of what could be announced.
“It becomes increasingly evident that this Government does not have any care or compassion for pensioners.
“The Chancellor has continued to hit pensioners every which way she can. She forgets we have all worked hard throughout our lives preparing for our retirement. The Government seems to see pensioners as an easy target to get money from – we are her ‘cash cows’ and second-class citizens, in my opinion”.
How can the Government avoid taxing the state pension?
Dennis Reed, a director at Silver Voices, told The i Paper he is “extremely worried” about the impact of frozen tax thresholds on the state pension and income tax, particularly those on low or modest incomes.
He said: “If the freeze is extended, it will undermine the whole state pension and triple lock system. It would mean the vast majority of older people will end up being taxed on their state pension and any triple lock increases. It immediately takes the value of any state pension increase down by 20 per cent.”
Reed wants to see the reintroduction of an age-related personal allowance for retirees, the likes of which was phased out from 2013. An immediate addition of £1,000 should be made available to older people, Reed said.
He said: “Pensioners have paid for their state pensions via national insurance contributions throughout their working lives. Why should they be taxed again on it?”
Reed believes the Government is “hostile” towards pensioners.
He said: “We only ever see anti-pensioner statements from the Government. We hear no words from anyone who recognises the challenges many older people on lower incomes are facing in today’s society. Many pensioners are struggling.
“The Government talks about working people and working families, but ignores pensioners”.
How much is the state pension likely to rise by?
Nearly 13m people receive the state pension in the UK and current projections suggest many pensioners will pay income tax on it from 2027 for the first time.
The triple lock policy means the state pension rises each year by either average earnings growth, inflation or 2.5 per cent, whichever is the highest.
According to recent data from the Office for National Statistics, average earnings growth including bonuses reached 4.7 per cent in the three months to July, making it the figure most likely to be used for the next state pension increase.
On this basis, the new flat-rate state pension, for people who reached state pension age after April 2016, is expected to rise to £241.05 per week next year, taking it to £12,534.60 a year, representing a £561.60 increase.
The standard personal allowance is £12,570, meaning, if the rise goes ahead, more pensioners will need to start paying income tax.
For those on the old state pension, and who reached state pension age before April 2016, the state pension looks set to increase by £184.75 per week, taking the annual total to £9,607. This would represent a £431.60 annual increase.
Will pensioners need to submit a self-assessment form to HMRC?
Generally, you will only need to pay tax on your state pension via HMRC’s self-assessment tax return system if you have to complete a tax return for another reason.
Having to pay tax on state pension income alone does not normally necessitate completing HMRC’s self-assessment process.