The DWP has issued a response to calls for the tax-free allowance for pensioners to be increased from the current £12,570 to £15,000.
DUP MP Gavin Robinson asked in Parliament if the Chancellor would assess “the potential merits of increasing the tax-free threshold for pensioners to £15,000”.
Financial Secretary to the Treasury, Nigel Huddleston, issued a response from the Government. He said: “The Government is committed to ensuring that older people are able to live with the dignity and respect they deserve.
“The personal allowance is currently set at a level high enough to ensure that those pensioners whose sole income is the full new state pension or basic state pension do not pay any income tax.”
The full new state pension is currently worth £10,600.20 a year and this will increase to or £11,502.40 a year from April, which is just over £1,000 away from the threshold for paying income tax.
State pension payments are increasing 8.5 percent from April, with the full new state pension increasing from £203.85 a week to £221.20 a week.
The full basic state pension will go up from the current £156.20 a week to £169.50 a week.
A petition calling for the state pension to be made exempt from income tax reached 33,600 signatures.
The Government said in its response that removing income tax from the state pension would make the system more complicated while providing the most benefits for those who pay more tax.
The reply said: “Removing income tax from the state pension would add complexity to the tax system and those paying higher rates of tax would receive the greatest benefit.
“Lower-earning individuals with income below the higher rate threshold would benefit less and those earning below the personal allowance would not benefit at all.”
The response also pointed out that the personal allowance has increased 30 percent in real terms since 2010 and that had it been uprated in line with inflation, it would be £9,655 for the current tax year, almost £3,000 less than the current £12,570.
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.”
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