New pension allowance solves one problem but creates another
A new tax allowance designed to prevent pensioners being brought into income tax risks adding further complexity to the tax system, the Association of Taxation Technicians (ATT) has warned.
The Government announced at yesterday’s Budget that it will introduce a new Pension Tax Allowance. This is intended to ensure that people whose income consists only of the state pension are not brought into paying income tax as an expected increase in the pension next year pushes it above the tax-free personal allowance.
The ATT agrees action was needed to address the interaction between the frozen tax threshold and pension increases, but warns that creating a separate allowance, including rules governing how it is tapered will make the tax system more complicated.
Jon Stride, chair of the ATT’s Technical Steering Group, said:
“It would clearly be undesirable for pensioners whose only income is the state pension to be brought into paying income tax simply because increases under the triple lock have pushed their pension above the frozen tax-free threshold. The new Pension Tax Allowance should prevent that happening.
“However, this is effectively a new tax allowance being introduced to deal with a problem created by the interaction between a rising state pension and frozen tax thresholds. As a result, solving one problem risks creating another layer of complexity in an already complicated tax system.
“It will be particularly important that pensioners can easily understand whether they qualify for the allowance and that HMRC’s systems apply it correctly, without taxpayers having to take unnecessary action themselves.
“Protecting people on modest retirement incomes from unexpected tax bills is a sensible objective. But in the longer term we would like to see a tax system where problems like this are addressed through a coherent approach to thresholds and allowances, rather than requiring the creation of additional reliefs and tapers.”