Rachel Reeves kicks older state pensioners in teeth again – new tax blow is final insult

The Chancellor is about to make basic state pensioners’ blood boil.

Rachel Reeves is going to create state pension mayhem with her new plan (Image: Getty)

Rachel Reeves has dug yet another tax hole for herself. She’s lining up a two-tier tax system for Britain’s pensioners, and this one will hit older retirees hardest. Worse, it will inflame a long-running grievance, as many older pensioners get a far lower state pension than more recent retirees. Now they face paying more tax on it too.

This mess flows directly from the frozen personal allowance, a policy introduced by the Conservatives and greedily extended by Reeves. The income tax threshold is locked at £12,570 until at least 2030/31. That’s dragging millions more Britons into the income tax net through fiscal drag, including pensioners who never expected to pay tax in retirement.

From April 2027, the full new state pension is set to exceed that frozen allowance. That’s absurd. It will haul hundreds of thousands more pensioners into the tax system, piling pressure on an already stretched HMRC.

Reeves claims she has a “simple workaround”. Inevitably, it’s nothing of the sort.

The Chancellor’s solution is a loophole where pensioners whose only income comes from the state pension won’t have to pay income tax on it during the current Parliament, even if it creeps above the personal allowance. Sounds jolly? Dig a little deeper and the problems multiply.

There isn’t one state pension. There are two. The new state pension applies to those who hit state pension age from April 6, 2016. It’s a single payment based on National Insurance contributions.

From next April, the maximum rate will be £12,548 a year.

Thanks to the triple lock, that figure will rise by at least 2.5% in 2027/28, lifting the new state pension to £12,862.

That’s £292 above the personal allowance, triggering a tax bill of around £58 for someone with no other income. That bill will rise steadily every year until 2031. Under Reeves’s plan, new state pensioners will be excused a tax bill.

However, those who retired on the old basic state pension won’t enjoy the same protection. And that’s where the problems start.

Both the new and basic state pension are protected by the triple lock. But the basic state pension is much lower. From April, it will pay a maximum of just £9,615, well below the personal allowance.

Even by 2031, it’s likely to remain well below £12,570. So no tax benefit here.

However, millions get this topped up by additional state pension, such as Serps and the state second pension (S2P).

These top-ups are designed to compensate people with lower basic pensions. Yet under Reeves’s so-called simple workaround, they WILL be liable for tax if the pensioner’s total income exceeds the personal allowance.

Many older pensioners already pay tax because of these additions, and Reeves’s plan does nothing to help them.

Pensioners living purely on the new state pension will be shielded from income tax, but older pensioners on the basic pension, boosted by Serps or S2P, will not.

The details have yet to be worked out. It may be subject to change. But as it stands, Reeves is piling another layer of complexity onto an already tangled system, then branding it simple. Older pensioners will feel abandoned yet again. It’s the Labour Chancellor at her finest.