Thank you for contacting me about Income Tax and the State Pension. I will deal with the issue of the personal tax allowance first and then how it affects people receiving the state pension.
Personal Tax Allowance: General Points
The income tax Personal Allowance rose with Consumer Price Index inflation as planned to £12,570 in April 2021. The income tax Higher Rate Threshold also rose as planned to £50,270 in April 2021. As announced by the Chancellor, the personal tax thresholds will be frozen until April 2028 to ensure strong public finances in the face of global headwinds. Even after this freeze, we still have the most generous set of tax-free allowances of any G7 country.
I note your concerns regarding the frozen tax thresholds. The Government made the difficult but necessary decision to maintain income tax thresholds, including the Personal Allowance, until April 2028 to ensure the tax system supports strong public finances. The Government has increased the Personal Allowance by over 40 per cent in real terms since 2010, ensuring some of the lowest earners do not pay any Income Tax at all. Moreover, if the Personal Allowance had been uprated by inflation every year since 2010-11, it would have only been around £9,650 in 2023-24, lower than its current level of £12,570.
I welcome the Chancellor's 2023 Autumn Statement, which included the biggest package of tax cuts to be implemented at a fiscal event since the 1980s, including cuts to National Insurance contributions (NICs) for 29 million people. The Government has built on this by making a further cut worth over £10 billion a year for workers across the UK, as announced at Spring Budget 2024; the main rate of employee NICs has been cut by 2p from 10 per cent to 8 per cent. Combined with the 2p cut announced at Autumn Statement 2023, this will save the average worker on £35,400 over £900 a year.
The Government has also cut a further 2p from the main rate of self-employed NICs on top of the 1p cut announced in the autumn. This means that, as of 6 April 2024, the main rate of Class 4 NICs for the self-employed has been reduced from 9 per cent to 6 per cent. Combined with the abolition of the requirement to pay Class 2, this will save an average self-employed person on £28,000 around £650 a year. The combined effects of these reductions to NICs also mean that a person on the average wage now has the lowest effective personal tax rate since 1975.
Any decision to modify our tax regime is a matter for the Treasury and careful consideration will be given to any proposed amendments to current income tax thresholds.
The State Pension and the Personal Tax Allowance
Income earned through employment is taxable. In general, benefits that are designed to replace income are also taxable, and the same applies to income from the State Pension. Income Tax is due on an individual’s total income above the Personal Allowance (PA), currently £12,570. Total income could include: the State Pension (the basic State Pension, the new State Pension, and the Additional State Pension); other taxable benefits; a private pension (workplace or personal); and any other income, such as money from investments, property, or savings.
It is important to note that the PA is currently set at a level high enough to ensure that those pensioners whose sole income is the new State Pension or basic State Pension do not pay any Income Tax. The Government has nearly doubled the PA since 2010, and in 2024-25 it will be more than 20 per cent higher in real terms than if it had been uprated by inflation since 2010-11. The PA is high by international standards – it is one of the most generous personal tax allowances in the OECD and the highest in the G7.
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 PA would not benefit at all.
The Government remains committed to ensuring that older people are able to live with the dignity and respect they deserve, and I therefore welcome that the Chancellor has increased the State Pension by 8.5 per cent, in line with September 2023 average earnings growth.
Support available beyond the State Pension includes Winter Fuel Payments and free eye tests, NHS prescriptions and bus passes. Some may also qualify for means-tested benefits including Pension Credit and Housing Benefit.
The Government keeps all aspects of the tax system under review, and any decisions on future changes will be taken by the Chancellor in the context of the wider public finances.
Thank you again for taking the time to contact me.
Craig Whittaker MP
April 2024