Hundreds of thousands of pensioners face a new 53% tax rate under changes buried in documents released after John Healey's Budget, triggering mounting anger.
The Chancellor's new Pension Tax Allowance scheme will give half a million pensioners a tax write-off worth up to £94 next year. He announced the changes because the new state pension will rise to £13,036 from April under the Triple Lock, which would exceed the tax-free allowance of £12,570.
He said that anyone above state pension age who had an income of up to £13,036 would not pay any income tax, regardless of where their money came from. The new tax-free allowance for people over state pension age will rise in line with the headline annual payment until at least April 2030.
New taper creates 'bizarre' 53% rate
But a new taper will create what former pensions minister Steve Webb calls a "bizarre" new 53% tax rate for pensioners whose income ranges from £13,037 to £13,319.
Mr Webb, a partner at LCP, said: "The Chancellor has created a bizarre 53% income tax rate for around 200,000 low income pensioners.
"They will find that each £100 of annual private pension they have built up above the rate of the new state pension will add £53 to their income tax bill.
"We are used to seeing high rates of income tax like this for top earners but not for those on very modest incomes.
"Yet again, complexity has been introduced to the tax system to fix a short-term problem but with no long-term solution in mind."
Tax break reduced for higher incomes
Mr Webb said that the maximum value of the break is around £94 in 2027-28. For those just above this income level, the tax break will be reduced at a rate of £1 taken away for every £3 of income above £13,037, he said.
Those on £13,319 or above, the tax break will therefore be reduced to zero. Many older people who have private pensions on top of the full new state pension will still face an income tax bill, though a taper will help prevent a 'cliff edge'.
Some of the oldest pensioners could miss out on relief from income tax if they get a higher state pension under the old, pre-2016 system.
Political and campaigner backlash
Robert Jenrick, Reform UK's economics spokesman, said: "Instead of raising the tax-free personal allowance for everyone, Burnham has contrived a fiendishly complex arrangement that creates crazy consequences. Tinkering just doesn't work. We have to slash waste so we can cut taxes across the board."
Campaigner Dennis Reed also hit out at the change. The director of Silver Voices warned: "Fiddling around the edges to solve one taxation problem, without grasping the nettle, inevitably leads to more anomalies.
"This is why we have campaigned for the personal allowance to be unfrozen for both pensioners and low income workers, or as a second preference, for an age-related personal allowance to apply to all older people.
"Now, those pensioners just above this very steep and sharp cliff edge are going to feel rightly aggrieved."
Treasury document details the measures
The Treasury document supporting the Budget announcement sets out the new measures. It says: "The Government will introduce the Pension Tax Allowance, ensuring that pensioners whose total income is up to the value of the full new state pension do not have the administrative burden of paying small amounts of tax.
"The value of the PTA is calculated by applying the basic rate of income tax (20%) to the difference between the full new state pension and the personal allowance.
"Individuals over state pension age are eligible for the automatic tax deduction if their income, regardless of source, is below or at the value of the full new state pension.
"For those with incomes just above the value of the full new state pension, the allowance will be gradually withdrawn through a taper."
Mr Healey confirmed in his Budget plans to ditch the pension Triple Lock in favour of a double lock if it wins the next election. At present, the Triple Lock pledge means the state pension should increase every year by the highest of inflation, average earnings growth or 2.5%.
From 2030 the Government intends to increase state pensions based on inflation or 2.5%, but still retain a link to long-term earnings growth.
Campaigners have vowed to fight his changes. The Daily Express organised a protest, in partnership with Silver Voices, outside Parliament on Wednesday moments before the Chancellor's maiden Budget. Around two dozen pensioners held placards saying "don't scrap our triple lock, Andy" and "save our triple lock".
More than 317,000 people have signed an online petition demanding Labour guarantee the measure for the future.
