Would Labour’s pension plans mean a ‘£1,000 retirement tax’?

“Under a future Labour government there’s a £1,000 retirement tax coming”.

Following the Conservative party’s “triple lock plus” policy announcement last week the party has claimed Labour’s pension plans would result in a “£1,000 retirement tax”, with the Prime Minister claiming in the Sunday Express that by not matching the Conservatives’ policy “under a future Labour government there’s a £1,000 retirement tax coming”.

During the first TV debate of the campaign on 4 June Mr Sunak also claimed that Labour’s plans would mean a “retirement tax” for pensioners.

We unpacked the Conservatives’ announcement in this explainer last week. This article looks at the difference between the two parties’ proposals, and what the Conservatives’ claim about a “£1,000 retirement tax” is based on.

What are the Conservatives proposing?

The Conservative party says that alongside maintaining the triple lock (under which the state pension increases each year in line with either average wage growth, inflation or by 2.5%—whichever is the highest) it will introduce a new age-related personal allowance that grows each year so that it will “always be higher than the level of the new state pension.”

What is Labour’s policy?

Put simply, Labour’s policy is a continuation of current government policy—maintaining the triple lock, but also maintaining the current personal allowance freeze until 2028. Labour would not raise the personal allowance for pensioners as proposed by the Conservative party.

Under this scenario the new state pension (paid to men born after 6 April 1951, and women born after 6 April 1953) is forecast to increase slightly above the personal allowance (currently frozen at £12,570) to £12,578 in 2027/28.

This would mean that, for the first time, someone whose sole income came from the state pension would have to pay income tax (albeit only on a very small amount of their income).

Pensioners whose sole income comes from the basic state pension (men born before 6 April 1951 and women born before 6 April 1953) would not be affected, as their income would remain below the personal allowance.

It’s worth noting the vast majority of pensioners receive additional income beyond the state pension (for example, through workplace private pensions)

Would Labour’s plan mean a ‘£1,000 retirement tax’?

The Conservative claim that Labour’s plans would amount to a “£1,000 retirement tax” for pensioners appears to be based on the amount the party says it’s “triple lock plus” plan would save the “average pensioner” in income tax cumulatively over the next parliament, compared to Labour’s position of maintaining current government policy.

The Conservative party estimates that under its plans the personal allowance for pensioners would increase to £13,040 next year, meaning the “average pensioner” (which it defines as a single pensioner with an income of about £23,000 a year) would pay £95 less in income tax than they would have if their personal allowance remained at £12,570.

By 2027/28 (when the state pension is projected to catch up with the personal allowance under the current government policy), the party says the average pensioner would pay £230 less a year than they would have were the threshold to remain frozen.

By 2029/30, when under current plans the threshold is expected to increase to around £13,080, the Conservatives say their “triple lock plus” would raise it to £14,450, meaning the average pensioner would be paying £275 less than under current policy.

Adding the savings for the average pensioner in each year between 2025/26 and 2029/30 together under the Conservatives’ policy gives a total of £1,010.

However, as the BBC’s Robert Cuffe has noted, the Conservatives’ plans would be worth much less to someone whose sole income came from the new state pension (approximately £29 in total), and would not impact people whose sole income comes from the basic state pension at all.

Overall the Institute for Fiscal Studies estimates that the Conservatives’ proposals would increase the incomes of around two-thirds of pensioners, while the Resolution Foundation says: “The bulk of the cut would benefit richer pensioners – especially those in households with more than one taxpaying pensioner.”

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Image courtesy of FlyD