Contribution
Thank you, Dr Huq, for your stewardship of this important debate. I also thank my hon. Friend the Member for Berwickshire, Roxburgh and Selkirk (John Lamont) for introducing the debate. Most importantly, I thank the 119,000 people who signed this petition, 247 of whom are from my constituency of Wyre Forest. I thank my hon. Friend the Member for Bognor Regis and Littlehampton (Alison Griffiths) for also raising this issue, my right hon. Friend the Member for South Holland and The Deepings (Sir John Hayes) for bringing up the WASPI women, and the Liberal Democrat spokesman, the hon. Member for Witney (Charlie Maynard), who needs hearty congratulations on getting Brexit into this debate—well done to him.
This is a timely debate, and I agree with the wider point at the heart of the proposal that the petition seeks to address. We are all facing a higher tax burden thanks to this Government’s choices and policies, and we are all really struggling with cost of living rises—again, thanks to this Government’s tax choices on employment. Pensioners, instead of living with the dignity in retirement that they have worked so hard for and deserve, have a greater financial burden placed on them. Now we have the prospect of the Chancellor of the Exchequer floating more tax rises in the next Budget. That is deeply concerning for all of us, but especially for those on low incomes. I hope that this Minister, who played a key role in the last Budget, will be able to rule out tax rises in the next Budget at the Dispatch Box here today.
The thrust behind the petition is very clear, but first we must understand the historical context of how the pension system works. That context goes back over a century to 1921, when the Government of the time struck a deal with future pensioners. The basis of that deal was that people could save money into a fund from untaxed earnings; the Treasury would contribute to that fund the tax that would otherwise have been paid. Then the fund would be allowed to grow without being subject to any tax during its lifetime. At the time of retirement, the fund would be used to provide an income for the pensioner but, importantly, that income would be treated as taxable income. It would be replacing the earnings that that individual would have been generating, had they still been in work. In 1946, when the state pension was introduced, that pension payout was to be subject to tax in exactly the same way that private pensions were back in 1921.
That system has remained unchanged ever since. The simple contract between the state and the pensioner has not changed at all since 1921. It is important to underline this point. Successive Governments maintain that a pension, whether state or occupational, is a form of income. Specifically, it is treated as a replacement for earnings. However, there have been breaks for pensioners, most notably the exemption from paying national insurance contributions. Today, a pensioner will be asked to pay income tax above the tax-free threshold, but they will not be asked to pay national insurance, as the working population do.
Where we can absolutely agree with the wider sentiment of the petition is that this Government are confusing the pension landscape. In their first 20 months, the Labour Government have not been the pensioner’s best friend. Prior to the last Budget, the Chancellor flew a few kites about reducing the tax-free lump sum. That resulted in pensioners withdrawing £3.9 billion in one-off lump sums from their pensions between October 2024 and October 2025. That was an increase of nearly 30% on the year before. When the Budget was actually announced, the Chancellor raided unused pensions in her inheritance tax calculations—a policy that will bring more families into paying inheritance tax and will mean that fewer people can pass money on to their loved ones when they die.
However, this petition talks specifically about the personal allowance. The last Government made a decision to help those in the bottom decile of earnings by increasing the tax-free threshold at an accelerated rate. That helped pensioners as well as lower-earning people, and over time it brought the state pension to a level below that of the tax-free threshold. That has two benefits: first, there is no tax for state pensioners, and secondly there is no tax return to be filled in by state pensioners. But now this Government are choosing to freeze income tax thresholds until 2031, and the Government have extended the freeze because of their economic mismanagement.
The Chancellor, in her first Budget, stated:
“From 2028-29, personal tax thresholds will be uprated in line with inflation once again. When it comes to choices on tax, this Government choose to protect working people every single time.”—[Official Report, 30 October 2024; Vol. 755, c. 821.]
As I say, that was her first Budget. After promising to not extend the freeze—something we would have supported —she went back on her word and chose not to protect hard-working people. That matters to pensioners, because the state pension will soon rise above the income tax threshold due to the triple lock, which we all agree is a good thing to remedy the ills that happened when the state pension fell to, I think, about 13% or 14% of average earnings. That means that pensioners will now have to start paying income tax on—[Interruption.] I am being heckled by the Minister.