Britons are bracing for a “painful” Budget at the end of October, after Sir Keir Starmer warned “those with the broadest shoulders should bear the heavier burden” to plug the £22billion black hole in public finances.
Rachel Reeves has already announced the Winter Fuel Payment will be means-tested from this winter, meaning an estimated 10 million people will no longer qualify for the payment – worth up to £300.
Age UK estimates as many as two million pensioners will be seriously hit by the cut. The charity warned these are people on low income who just miss out on Pension Credit, those with high energy needs because of disability/illness and the one million pensioners who don’t claim Pension Credit despite being entitled to it.
It’s not clear if there’s further bad news for pensioners on the way in the Budget, but with the state pension being the largest single item of welfare spending, and pensioner costs having tripled since 2000, many pensioners have told GB News they are worried.
Pensioner benefit spending was forecast to total £138billion in England, Scotland and Wales in 2023-24, of which £125billion was projected to be spent on state pensions, according to the OBR, prompting speculation the Chancellor could be eyeing up cuts to pensioner spending.
While Labour has not revealed any further plans to shake-up pensioner benefits, there are a range of issues which financial experts believe the Government must address.
Frozen tax thresholds amid rising state pension
In the 2024 manifesto, Labour pledged to protect the state pension triple lock on pensions and increase the state pension each year in line with the highest out of inflation, average earnings, or 2.5 per cent.
The inflation data won’t be released until October, but with the Consumer Prices Index (CPI) inflation rising by 2.2 per cent in the year to August, it’s likely average earnings – coming in at four per cent – will be the element used in the triple lock next year, if the Government continues to commit to it.
For those who get the full new state pension, it could mean an extra £460 in state pension – but that’s before the frozen income tax allowances are considered.
While the state pension increase may be welcome news for many, the income is taxable.
Antonia Stokes, Technical Officer at Low Incomes Tax Reform Group, warned that, in many cases, the state pension falls below a person’s tax-free allowance – the standard personal allowance is frozen at £12,570 until April 2028 – but it “can still have a knock-on effect for other income sources”.
“The more the value of the state pension increases, the more it uses up the amount of income you can receive tax free,” the tax expert explained.
“There are many state pensioners who already pay tax because they also have other income sources, such as a private pension, taking them over their personal allowance.”
The potential £460 rise in the full new state pension could result in an extra £92 of income tax for some pensioners, Stokes explained, adding: “So the overall increase to the cash in their pocket will be £368. The increased tax bill will be even higher for those paying tax at the higher or additional rate of income tax.
“Many will say this is a case of the government giving with one hand and taking away with the other, which overall is hard to disagree with.”
While many pensioners’ state pension income is currently below the standard tax-free personal allowance, others are already being affected.
Stokes said: “The problem isn’t restricted to those with additional income sources. Some state pensioners have enhanced state pension entitlements which already tip them over the tax-free threshold.
“In some cases, these people have no income other than their state pension, but in recent years they have found they face a year-end tax bill. We have heard from many people who are shocked and upset by this.
“The further increase to state pension from April 2025, coupled with the continued freezing of allowances, means there are likely to be many more state pensioners who are tipped into paying income tax on their state pension income next year.”
The tax freeze was brought in by the Conservative Party – Rishi Sunak froze tax allowances until 2026 during his time as Chancellor, and Jeremy Hunt later extended the freeze until 2028 – in a cash-raising measure known as fiscal drag.
Sometimes dubbed a “stealth tax”, the Treasury can rake in more money through tax as income rises with inflation but the thresholds remain fixed, which can drag people into higher tax brackets.
For those who are taxed purely on the state pension, a nasty tax surprise could be in the pipeline.
Rather than seeing a small amount of tax shaved off their pension income automatically each month, these people are likely to face an end-of-year tax demand.
Earlier this year, Kelly Sizer, Senior Manager at Low Incomes Tax Reform Group (LITRG), called for HMRC and the DWP to write to pensioners to “explain what is happening, at the very least”.
She added: “We think there are other solutions they could consider, such as working out a way to take off the tax before the pension is paid out, saving pensioners the worry of waiting until the end of the tax year to know what they owe.”
Underpaid state pensions
HMRC is currently writing to hundreds of thousands of mothers who are over state pension age, informing them they may have missed out on National Insurance credits (specifically Home Responsibilities Protection, which ran between 1978 and 2010) for time they spent caring for their children.
However, when those eligible fill in the form and are awarded the credits/HRP, they end up in a large queue while the DWP recalculates the state pension and any arrears due, Sir Steve Webb, partner at pension consultants LCP told GB News.
“‘Where people are being underpaid state pension because of official error, this should be sorted out quickly and efficiently,” Sir Steve said.
“At present people have to deal first with HMRC, claiming missing credits, and then wait for DWP to reassess their state pension.
“People are being left in limbo for months, even though they may have been underpaid for years or decades.
“There needs to be a much more seamless way of putting things like this right.
“People who have already lost out shouldn’t have to jump through hoops and be left hanging for a resolution.”
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Pension Credit take-up
Up to 880,000 of the poorest pensioners are missing out on a top-up benefit which could unlock extra support.
Pension Credit, currently claimed by around 1.4 million pensioners, is worth up to £3,900 per year, on average, and a claim could unlock further financial help worth hundreds.
By claiming Pension Credit, people will also be able to get the Winter Fuel Payment this winter – which is worth up to £300.
Age UK is urging any pensioner “who is feeling the pinch” to check if they’re eligible for help this winter.
Despite numerous campaigns to drive the take-up of Pension Credit over the years, only 63 per cent claim it and the figure hasn’t exceeded 66 per cent in the last decade.
Caroline Abrahams CBE, Charity Director at Age UK, added: “Yet there is £1.7billion pot of money waiting for those older people who are entitled to it, and it could make a big difference to their quality of life.
“We would encourage anyone with an older person in their lives to strike up a conversation about the cost of bills and mention this extra help that might help them to cope and stay warm this winter, if they put in a claim.”
The DWP launched a Pension Credit take-up campaign earlier this month, to try and encourage pensioners to check their eligibility and apply.
Martin Lewis, founder of Money Saving Expert, said at the time: It’s a national tragedy that nearly a million eligible low-income pensioners who’ve paid into the system for years are still missing out on the crucial Pension Credit financial lifeline – a better name for it would be the State Pension Top Up.
“So whatever your age, take a second to understand how it works, so we can all ensure the message is spread to every nook and granny (and grandpas too). Especially as the government has just severed Winter Fuel Benefits eligibility for millions, yet if you claim Pension Credit you’ll still get it.
“While for most single pensioners, you need total weekly income, including from savings, under around £218 (pensioner couples under £333) to be very likely to qualify, my rule of thumb is spend a few minutes to check even with weekly income up to £235 (pensioner couples £350) as there’s still a chance some may be eligible.
“Pension Credit can pay out £1,000s a year, but even if it’s only going to pay you thruppence, still claim it! As once you get it, it’s a gateway benefit that opens the door to other entitlements – including council tax reductions, free TV licences (if age over 75) dental and optical support and more.”
Pension Credit can be backdated by up to three months and the final possible date to make successful backdated claim in order to receive the Winter Fuel Payment is December 21.
