Tax on state pensions to be abolished?

Should you pay tax on the basic state pension? Many British pensioners do. It's thought that well over 5.5m pensioners pay tax thanks to interest on savings and private pension arrangements hauling them across the tax threshold.

But a new report to the Treasury is proposing scrapping tax on state pensions - and it could leave many more than £1,000 better off.

Cash boost

The basic full state pension is valued at £5,311. By lopping 20% off it in basic income tax, that has a cash value of £1,060. This sum would make a considerable difference for many, given rising living costs. However, no decision has been made on the issue, but The Office for Tax Simplification recommendations are being drawn up for Ministers to consider.

The Office for Tax Simplification carries some weight given that it is an independent organisation. It claims the current system for taxing pensions remains confusing for some, and is also potentially unjust for many. (It's thought many pensioners are even unaware that their state pension income is taxed.)

"Our report floats a number of possible ways forward to mitigate the difficulties pensioners face," says John Whiting, Tax Director for the Office of Tax Simplification. He adds: "We are aiming to make final recommendations that will mean pensioners can have a better understanding of a simpler tax system, and can deal with their responsibilities more easily."

Five biggest taxpayer stings

Five biggest taxpayer stings


The background to the possible changes - more people working longer, perhaps deferring taking pensions (whether state or private) plus compulsory retirement ages disappearing and the introduction of auto-enrolment - is making the UK pensions landscape more complex.

But when one hand gives, another may take away: it's possible that the current higher tax allowance - £9,940, for those between 65 and 74 - may be abandoned as part of potential new changes.

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