State Pensioners: Personal Allowance

The Government regularly tell people that they have not increased income tax rates. However, pensioners, who are a savvy bunch, can see exactly what is happening. They do not need a Treasury briefing to understand where more of their income is being taxed each year. The Chancellor chose to extend the freeze in the personal allowance until 2031. That was a political choice. It means that more pensioners will continue to be drawn into the tax system year after year. Ministers cannot make that decision and then act surprised when pensioners ask questions about fairness.

What concerns me most is the uncertainty. Last year’s Budget included an announcement that pensioners whose sole income is the state pension should not have to deal with small tax bills through the simple assessment process from 2027. Yet my constituents still do not know who will qualify, how the system will work, when the details will finally be published or how pensioners will be protected from unexpected tax demands. Those are reasonable questions, and people deserve answers.

There is also a broader principle at stake. At the previous general election, the Conservatives set out a different approach: we argued that the tax-free allowance for pensioners should keep pace with the state pension, so that people could benefit from rises in the state pension without constantly worrying that frozen thresholds would erode those gains. Whether or not Members agree with that approach, at least it sought to address the underlying problem. The Government’s approach so far has been to extend the freeze, promise further details at some future point and ask pensioners to wait. My constituents deserve better. In Rustington, in East Preston and across Bognor Regis and Littlehampton, pensioners want clarity, fairness and above all a Government who recognise the contribution that they have made throughout their working life.

I am not here to write the Budget from Westminster Hall, but I am here to say very clearly that pensioners in my constituency should not find themselves paying more and more tax simply because thresholds remain frozen year after year. I hope that the Minister will provide some answers today.

I endorse entirely what my hon. Friend the Member for Bognor Regis and Littlehampton said, but—with your further indulgence, Dr Huq—I want to make two other points. I want to make a case, as I have before in this very Chamber, for the WASPI women. Those women were caught out by a change in the provision of pensions due to an alteration in the age at which women retired. They have suffered an injustice; that is not just my consideration or judgment, but that of the ombudsman, who accused the Government of maladministration. Those women, too, deserve a hearing.

Before you call me to order, Dr Huq, and tell me that I am digressing from the subject at hand—

Notwithstanding his change of status, I suspect the Minister still thinks seriously about these things from time to time, when he is not busy doing the other duties that are a necessary part of governing, including replying to my correspondence. I am sure he must have considered this issue in the broad-minded way for which I know he is famed. For heaven’s sake, let us raise thresholds. Let us protect pensioners. Let us cut welfare, but cut it wisely and reduce the benefits of those who choose not to help themselves. Welfare is a safety net, is it not? It should always be for those who cannot do without it.

With those few thoughts, I leave the matter to the wisdom of the Minister and to the remainder of the Chamber —but I stand firmly and squarely behind the very appropriate advocacy of my hon. Friend the Member for Bognor Regis and Littlehampton for the pensioners in her constituency, and I stand with the pensioners in mine.

Ultimately, stealth tax rises are not only dishonest with voters, but a completely inadequate and ineffective way for the Government to paper over the cracks in their economic plan. There is no better way to get the economy growing than to make everybody feel better off; the best way to balance the books is to grow our economy, and the quickest way to do that is to repair the damage of the terrible Brexit deal by negotiating a new UK-EU customs deal. A better trade deal would be a huge boost to our public finances, and the best and fairest way to end the crisis in the NHS, boost our defence capabilities and look to reduce the unfair tax burden that people have shouldered for the last few years.

The Liberal Democrats are clear that everyone deserves a chance to enjoy a decent retirement where they can live comfortably, whether in my Witney constituency or anywhere else in the country. We strongly opposed the Government’s decision to remove the winter fuel payments. We welcomed the Chancellor’s U-turn in that case, restoring payments to pensioners with incomes of £35,000 or less, but we continue to call on the Government to backdate payments to those who lost out and to confirm that the £35,000 threshold will be uprated with inflation each year.

We were proud when in government to introduce the triple lock. It was desperately needed after years of the real value of the state pension falling, as was set out very well by the right hon. Member for South Holland and The Deepings (Sir John Hayes). We will always fight to guarantee that pensions keep pace with the cost of living. We want to develop measures to end the gender pension gap in private pensions and ensure that working-age carers can save properly for retirement. We would also like to see improvement to the state pension system by investing in helplines to ensure quicker resolution of underpayments, and an end to the scandal of lost top-up payments through an overhaul of the processing system and provision of proper receipts.

In summary, I urge the Government once again to reconsider the freeze on tax thresholds, which has dragged millions of people into paying more tax at a time when cost of living pressures are hitting people at all stages of life really hard. Raising the thresholds would ensure that pensioners, as well as working-age households, got a fairer deal. The Government should stop using stealth tax grabs to paper over the bigger issues in the economy and boost trade to get the economy moving, making everyone feel better off. Finally, I ask the Minister to spell out how he will ensure that people on the state pension are not dragged into paying income tax on it, so that we can give peace of mind to older people on low incomes.

The thrust behind the petition is very clear, but first we must understand the historical context of how the pension system works. That context goes back over a century to 1921, when the Government of the time struck a deal with future pensioners. The basis of that deal was that people could save money into a fund from untaxed earnings; the Treasury would contribute to that fund the tax that would otherwise have been paid. Then the fund would be allowed to grow without being subject to any tax during its lifetime. At the time of retirement, the fund would be used to provide an income for the pensioner but, importantly, that income would be treated as taxable income. It would be replacing the earnings that that individual would have been generating, had they still been in work. In 1946, when the state pension was introduced, that pension payout was to be subject to tax in exactly the same way that private pensions were back in 1921.

That system has remained unchanged ever since. The simple contract between the state and the pensioner has not changed at all since 1921. It is important to underline this point. Successive Governments maintain that a pension, whether state or occupational, is a form of income. Specifically, it is treated as a replacement for earnings. However, there have been breaks for pensioners, most notably the exemption from paying national insurance contributions. Today, a pensioner will be asked to pay income tax above the tax-free threshold, but they will not be asked to pay national insurance, as the working population do.

Where we can absolutely agree with the wider sentiment of the petition is that this Government are confusing the pension landscape. In their first 20 months, the Labour Government have not been the pensioner’s best friend. Prior to the last Budget, the Chancellor flew a few kites about reducing the tax-free lump sum. That resulted in pensioners withdrawing £3.9 billion in one-off lump sums from their pensions between October 2024 and October 2025. That was an increase of nearly 30% on the year before. When the Budget was actually announced, the Chancellor raided unused pensions in her inheritance tax calculations—a policy that will bring more families into paying inheritance tax and will mean that fewer people can pass money on to their loved ones when they die.

However, this petition talks specifically about the personal allowance. The last Government made a decision to help those in the bottom decile of earnings by increasing the tax-free threshold at an accelerated rate. That helped pensioners as well as lower-earning people, and over time it brought the state pension to a level below that of the tax-free threshold. That has two benefits: first, there is no tax for state pensioners, and secondly there is no tax return to be filled in by state pensioners. But now this Government are choosing to freeze income tax thresholds until 2031, and the Government have extended the freeze because of their economic mismanagement.

The Chancellor, in her first Budget, stated:

“From 2028-29, personal tax thresholds will be uprated in line with inflation once again. When it comes to choices on tax, this Government choose to protect working people every single time.”—[Official Report, 30 October 2024; Vol. 755, c. 821.]

As I say, that was her first Budget. After promising to not extend the freeze—something we would have supported —she went back on her word and chose not to protect hard-working people. That matters to pensioners, because the state pension will soon rise above the income tax threshold due to the triple lock, which we all agree is a good thing to remedy the ills that happened when the state pension fell to, I think, about 13% or 14% of average earnings. That means that pensioners will now have to start paying income tax on—[Interruption.] I am being heckled by the Minister.

It is not just policy that is blighting pensioners. The Sunday Times has highlighted that up to 8.7 million pensioners have been overcharged on their tax bill by an apparently careless taxman. That means that as much as £43.5 million was collected in error last year. I am pleased that HMRC is putting that right and that the fix should be finalised in the summer, but it has been working on this for a year. It is taking far too long. Will the Minister set out what he will do to resolve the situation and confirm to the House when it is fixed?

This petition is well-intentioned and it is correct that we are all facing a higher tax burden than ever before. As has been reported, many pensioners are being overcharged on their tax bill. The Government need to get a hold of this situation and do more to reduce the tax burden on pensioners, because, as we have heard from many Members today, they deserve dignity and security in their retirement, but they have been left wanting by this Government.

I look forward to hearing from the Minister whether he is willing to raise the tax-free threshold, as identified in this petition, from £12,500 or thereabouts to £25,140, and will then maintain it at 200% of the working person’s tax-free threshold. Will he agree with the petition, or will he rule out that proposal today?

Finally, I have been shadowing the Minister for about 18 months now. He is a very decent gentleman and I enjoy shadowing him. I wish him the very best of luck in the upcoming reshuffle after the by-election on Thursday.