POLICY OF TRUTH

One interesting development to come out of this year’s Budget on the back of the continued freezing of tax thresholds is what to do about all those oldies whose only income comes from the state pension as they inch closer and closer to the tax cliff edge.

The Chancellor has said that people whose ONLY income comes from the state pension will not have to pay tax or at least not pay it until the year 2030.

Really?

Now I’ve highlighted the word ONLY because how is the Treasury or Revenue going to ascertain that you don’t have anything other than what the state provides to live on? Unless there is going to be some kind of ‘income assessment’ carried out on the over 65/67s then the Government has to rely on citizen truth and in my mind fessing up as to where you got your ‘readies’ from could be very nebulous.

I’m not saying old people are liars but almost everyone would do anything to avoid paying unnecessary tax including stretching the truth a bit. It’s not so much as ‘lying’ but the sin of omission. That cash-in-hand cleaning job, a few quid now and then from the kids, spare room or driveway rental, selling junk at the local car boot every week. I’ve even seen Silver Deliveroo collectors in the queue at McDonalds. I’m sure they’re not doing it for the love of or to combat loneliness but to supplement their retirement income.

Rachel then went on to explain that SMALL tax sums would normally be collected via a Simple Assessment process completed by the Revenue and we all know that nothing that ever spews from the mouth of HMRC is ever ‘simple’.

This time, I’m focussing my attention on the word SMALL in her statement. What would be classified as a small tax sum that would not be worth the administrative hassle to collect? Are we talking fifty quid or a couple of hundred?

There would have to be a benchmark amount below which any tax due could be excused or above which, the tax would need paying. For clarity and fairness, you simply cannot apply a random approach to this issue. A numerical line needs to be drawn somewhere because if there isn’t one then a pensioner falling into this category is always going to be living in fear of a brown envelope landing on the doormat with a tax demand.

Let’s look at this situation with a practical example. In this example, the tax threshold has been frozen at the current level of £12,570 until the year 2031.

Just for arguments sake, I’ve decided to increase the state pension amount every year from 2026 by 4% (slightly less than this year’s 4.8% increase). An increase of 4% would boost the annual state pension by about £500 or so every year.

Next year, a person with ONLY the state pension to live on would be £22 under the tax threshold. However, from 2027 onwards a 4% pension increase gives rise to taxable income. If the income tax rate remained at 20% until 2030 you’d lose a fifth of your income in tax.

So, back to my question – at what point would you send out a tax demand? Do you let people off a couple of hundred quid or not?

Multiply that couple of hundred quid by millions of state pensioners claiming they’ve got nothing else to live on and suddenly that’s a helluva lot of tax going uncollected.

Fairness doesn’t really come into it because a part time worker earning the same amount in annual salary is not going to be let off paying small amounts of income tax because it’s too much of an administrative hassle.  Definitely not.

Freezing tax thresholds was always going to give rise to this scenario so it should have come as no surprise to whatever party is in power. They should have already been working on a solution to this issue rather than now being caught on the back foot.

It remains to be seen how the Government take this forward. Will they:

Consider a form of Income Assessment for all pensioners? If they do, this could lead to a means tested state pension with lower amounts paid to those who paid into private pension schemes.  

Set a Tax Benchmark Amount to define which tax liabilities will be excused.

Or alternatively, will they create a new separate Tax Code purely for those pensioners with no other forms of retirement income but then you’d have to go back to the first point to identify those who qualify for a tax exemption and continue to re-assess their income until they no longer do.

The Chancellor is taking a big gamble relying solely on the policy of truth to determine how to take this forward.

If you didn't spot the article on the BBC website, you can access it in full from here:  https://www.bbc.co.uk/news/articles/cev8ed9klz1o