An economist has highlighted a “big plus” of a tax break policy put forward by the Conservatives that could save state pensioners £300 a year in taxes.
The Tories have set out plans for a ‘triple lock plus’, with the personal allowance for state pensioners to increase each year using the triple lock metric.
Julian Jessop, economics fellow at the Institute of Economic Affairs, said a “big plus” of the policy is “poorer retirees living just on the state pension won’t pay income tax”.
The full new state pension is currently £221.20 a week, or £11,502.40 a year, which is only £1,000 away from being subject to income tax, with the personal allowance currently at £12,570.
The Conservatives said the rise in the personal allowance would deliver tax savings of almost £300 a year for pensioners by the end of the decade.
Mr Jessop also listed some drawbacks with the suggested policy. He said: “All pensioners will benefit, even the wealthiest; favours pensioners over younger people; further complicates the tax system; doubles down on the ‘triple lock’ itself (which many economists believe is unsustainable).”
Kirsty Anderson, retirement specialist at Quilter, said there will need to be action on the personal allowance whoever wins the General Election.
She said: “Our previous analysis found that pensioners could need to pay back a proportion of their state pension in income tax in just two years’ time.
“Simply from an administrative point of view this would prove difficult for HMRC so it seems unlikely if Labour were to get in, they would not be forced to act in some way.
“Frozen thresholds continue to raise tax revenues through the backdoor due to fiscal drag. Unless thresholds are changed meaningfully the whole nation will suffer an ever-bigger tax burden.”
Ms Anderson also pointed out the issues around fairness with raising the personal allowance just for pensioners.
She said: “Increasing the personal allowance just for pensioners may be popular with pensioners but the rest of the tax paying public may feel that separate more beneficial rules for pensioners further increases intergenerational inequality.”
Claire Trott, divisional director of Retirement & Holistic Planning at St. James’s Place, spoke about the potential impact of the ‘triple lock plus’ policy.
She said: “The concept of the state pension being taxed and the complexities this would bring has often been discussed, such as the costs and resource required to chase tax returns for those whose only income is the state pension.
“These new proposals would remove this concern and be welcomed by pensioners. It would also have an impact on those with personal pensions and other forms of retirement income, as the personal allowance isn’t only applicable to the state pension and will mean that those who have diligently saved in their lifetimes will still benefit too.”
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