State pension should be tax-free, says petition as anger grows over looming bills | Personal Finance | Finance

A Parliamentary petition is calling for the the state pension to be made tax free as more pensioners are being dragged into paying tax.

The petition states: “The Government should remove income tax on state pension payments, to reduce the tax burden on pensioners.

“As the personal tax allowance has been frozen, some pensioners will now need to fill in tax return. We believe income from state pensions should be tax free, in the same way as benefits are.”

The threshold for paying income tax has been frozen at £12,570 a year, meaning a person who earns more than £242 a week will have to pay income tax. The current full new state pension is already nearing the threshold at £203.85 a week.

State pension payments will increase 8.5 percent in April, with the full new state pension climbing to £221.20 a week, meaning those on this amount will pay tax if they earn just £1,068 a year more.

A person on the full amount for the basic state pension currently receives £156.20 a week, and this will rise to £169.50 a week from April, increasing to £8,814 a year.

The petition has had more than 850 signatures at the time of writing. If it reaches 10,000 signatures, the Government will issue a response.

Wealth management group Quilter previously calculated if pensioners get at least a four percent pay increase over the next two years, they will be paying tax on their payments in two years’ time, under the current rules.

Roddy Munro, tax and pensions specialist at Quilter, said: “We are soon set to be in the perverse situation where pensioners might have to start paying back their state pension to HMRC because of frozen allowances.

“Given that state pensions will shortly eradicate someone’s personal allowance, any private pension provision other than the tax-free cash lump sum will therefore become taxable at a client’s highest marginal rate.

“For many that could mean big tax bills depending on how much they drawdown. In addition, with the maximum amount of tax-free cash available now capped at £268,275 this adds in another layer of complexity if strong investment returns are achieved as this can only now ever lead to increasing the amount of someone’s pension that becomes fully taxable.”

Mr Munro warned that pensioners are often worst hit by frozen tax allowances, He explained: “They typically will be getting their income from a number of different investments and therefore lean heavily on capital gains tax and dividend allowances to help create a retirement income in addition to their pension.

“However, the Government has made it very difficult to avert being taxed very heavily on these types of investments. It is now incredibly important for people to look across the spectrum of financial products out there that provide tax efficiency and use them in the right way and at the right time to try to prevent their income being eroded by tax.

“Seeking professional financial advice can help someone make the most of their finances as current fiscal policy now mandates a different approach to financial planning.”

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