Protecting pensioners from income tax is unfair to workers

As Chancellor John Healey prepares to raise the tax-free allowance for pensioners, exempting them from income tax while keeping working-age allowances frozen creates an unnecessary and unfair divide, says Matthew Bowles Today, Chancellor of the Exchequer John Healey will face the unenviable task of persuading the public that Britain’s finances add up. No matter how reassuring his intonations and well-calibrated his pauses, the arithmetic looks to remain stubbornly uncooperative.

Perhaps the occasion might be made a little easier for him if he opts for his favourite tipple, reportedly a cold glass of Chantry beer, over the recently preferred glass of water. Presenting a budget has been a thankless task for quite some time, Britain is still struggling with sluggish growth, a punishing tax burden and public debt levels approaching 100 per cent of GDP. Quick, someone man the barricades! One policy expected to feature is the shielding of almost a million pensioners from income tax.

The full State Pension is expected to rise by £489 to £13,036 next April, an increase of 3.9 per cent – relatively modest by recent standards. Unfortunately, the personal allowance has been frozen at £12,570 since 2021 and is not set to rise until 2031. Therefore, without government intervention, thousands of pensioners would find themselves liable to pay income tax. Healey’s solution – tinker and raise the tax-free allowance for eligible pensioners to match the full State Pension, at a cost of about £200m a year in foregone tax receipts by the end of the decade.

There is nothing inherently wrong with protecting pensioners on low incomes. The State Pension is hardly a king’s ransom, and it is true that those who are elderly have far less opportunity to make up any shortfall by working longer hours or changing jobs. But if the government believes £13,036 is the minimum income people should receive before paying tax, why should that apply to pensioners alone? Consider the scenario of two individuals, one a pensioner and one a worker, receiving identical incomes of £13,036 a year.

Under the proposals the pensioner would pay no income tax, yet a worker would pay the basic rate on the amount above the personal allowance (£466), a sum of about £93.20 a year. Nobody is going to retire to St Lucia on the difference, but it does raise the question of fairness. The argument that the non-pensioner could always work more doesn’t really wash: if it were easy for them to be earning more, presumably they’d be doing so already.

Triple lock The proposal sits rather awkwardly alongside the party’s long-term plans for pensioners. Just a month or so ago, at Labour Party Conference, Burnham indicated that the triple lock in its current form – which raises it by whichever is highest of inflation, average earnings growth or 2.5 per cent – will end in 2030, with a replacement intended to preserve the pension’s value relative to average earnings and help fund an NHS-style social care system.

This suggests that the Labour Party lack a cohesive plan for pensioners, giving assurances today, whilst difficult decisions are left for others tomorrow; safely beyond the next election. By then, Burnham might be able to wash his hands of the problem, similar to a shopaholic leaving the next credit-card bill for someone else to pay. Another such example is the Winter Fuel Payment U-turn in May 2025. Initially, the benefit was restricted to pensioners receiving Pension Credit and certain other means-tested benefits, justified on the grounds that support needed to be targeted at those who required it most.

Following fierce backlash, the course was reversed, restoring payments to most pensioners whilst arranging for those with incomes above £35,000 to pay back the allowance through the tax system. Of course, by itself, £200m annually in foregone tax receipts will hardly break the Treasury . The same is true of a moderate increase in the Winter Fuel Payment or Attendance Allowance. Each measure might be defensible on its own. But as is so often the case with piecemeal measures for specific interest groups, taken together, these additional protections are creating an increasingly distorted system in which pensioners are shielded from pressure which others, who may be in the exact same financial situation, are expected to absorb.

Britain already has one of the most over-complicated tax systems in the developed world. Chancellors should be pursuing simplification, not endlessly contorting the system around one particular group. There is obviously political logic to this rumoured policy to protecting pensioners, even if they have historically been more inclined to vote Conservative (and now Reform according to recent polling). Pensioners vote in large numbers, and no government would wish to alienate such a group, even if they may not be primary targets.

Being perhaps overly cynical, it wouldn’t surprise if Healey were attempting to pre-empt attack lines from the Tories and Reform, over Labour’s treatment of the elderly, especially after Burnham’s conference speech. Despite persistent claims otherwise, there is little justification for working-age taxpayers to view their frozen allowances as an unavoidably economic necessity. The Government has put the cost-of-living at the heart of its policy agenda, it must therefore explain a policy that feels like one rule for thee but another for me, where vital protections are distinguished by age rather than by means.

Currently, the Budget risks adding yet another exemption to a tax system already struggling under its own complexity. Matthew Bowles is senior policy researcher at the Prosperity Instituite