Analysis from Quilter shows frozen tax thresholds and the rising state pension have pushed many retirees with only the state pension into the tax system, prompting the government to scrap these small debts—a move critics say patches over deeper flaws in the system.
Jon Greer, head of retirement policy at Quilter:
Frozen tax thresholds and the triple lock have created an absurd situation where the state pension now takes up so much of the personal allowance that thousands of pensioners whose sole income is the state pension are being dragged into the tax system. The government’s decision to write off these “small tax” bills from 2027 is a sticking-plaster solution to a problem of its own making.
This is the inevitable consequence of tax policy that hasn’t kept pace with reality. HMRC simple assessment letters have soared as more retirees unexpectedly face tax bills. In the past, age-related personal allowances helped protect older taxpayers: in 2012–13, those aged 65–74 had an allowance of £10,500, and those 75 and over had £10,660, compared to £8,105 for under-65s. Simplifying to one allowance made sense, but freezing it has created a new mismatch.
Scrapping these bills will ease confusion, but it doesn’t fix the underlying problem. With the state pension rising 4.8% next April under the triple lock and thresholds frozen, this mismatch will keep growing. This also won’t help pensioners that have only very meagre additional pensions.
This issue puts the triple lock back in the spotlight albeit the Government has committed to maintain it until 2029. The formula, whichever is highest of earnings growth, inflation, or 2.5%, was introduced to protect pensioners during low growth and reverse decades of decline in pension value. But today, it acts as a rigid mechanism that drives up spending regardless of affordability or fairness.
A better alternative would be a smoothed earnings link, basing annual increases on a rolling three-year average of wage growth. This would reduce volatility and align pension increases with long-term trends. During periods of high inflation, pensions could rise with prices until real earnings recover, then revert to the earnings benchmark. This approach offers fairness, predictability, and fiscal discipline, supporting pensioners while recognising pressures on working-age taxpayers.
