I get a lot of emails. They cover a variety of topics, but recently, many from pensioners worried about tax. I couldn’t understand why this had come about, until this week’s Treasury questions in Parliament.
Shadow chancellor Rachael Reeves asked a bizarre question. She asked why the chancellor was taxing pensioners to pay for the national insurance employee contribution cuts announced recently. It was an extraordinary question and there is talk about her being reported for deliberately misleading parliament. I know Rachael quite well, and she is better than this.
Let me be clear. Pensioners are not being taxed any more than before. Let’s look at some history.
The contract between the state and pensioners goes back to the first world war. Around 1920, the government set out the agreement that still stands today. People were encouraged to save for their retirement. To incentivise this, the government allowed contributions to made from pre-taxed earnings. This scheme would then earn income that was tax free (Gordon Brown raided share dividend income back when Labour was last in power). On retirement, this fund would then provide an income that was treated as any other income, liable to the income tax rules. That rule has stood for over a century.
Separately, national insurance was introduced after the second world war to pay for the NHS, but it was decided that this would not be levied on pensioners and that has been the case for 75 years.
In the last budget, the chancellor decided that taxing people for being in work is a bad idea, so we have set out a plan to remove national insurance. It has dropped from 12% to 8%, and will continue to go down to zero (if we are re-elected).
Separately, we (and everyone else, for that matter) were shocked at how the previous Labour government treated pensioners. The state pension was allowed to halve in value compared to average earnings, epitomised by a staggeringly condescending 50p rise in pensions back in the early 2000s. In 2010, George Osborne introduced the triple lock as a mechanism to restore value to the state pension, where pensions rise by the highest of CPI inflation, wage inflation, or 2.5%. That has brought the state pension back to where it was in 1997, when Labour came to power. But we have promised that, if elected, the triple lock will remain for another 5 years.
So, there is no tax raid on pensioners. The state pension went up by 8.5% this year and we have even been increasing the threshold that people start paying tax to £12,500, so that no pensioner on the state pension pays income tax.