How a two-tier state pension became Labour’s latest weapon against workers

By handing tax breaks to just some retirees, the Chancellor has opened a divide that will grow and grow Daily Telegraph 06/12/25 link Division – or a perception of it – ripples throughout many facets of British society, from policing and the justice system to the chasm between private and public sector workers.

One aspect of civic life that has, until now, escaped the “two-tier” tarred brush is the state pension. But that is about to change. In last month’s Budget, Rachel Reeves made the devastating confirmation that income tax thresholds would be frozen for three more years, dragging hundreds of thousands of pensioners into the income tax net from 2027-28, and potentially including those on the full new state pension, when annual increases push it above the £12,570 personal allowance. Then, without fanfare and almost in a whisper, the Chancellor announced that people on solely the old or new state pension would not pay tax this Parliament. The Chancellor later repeated the policy on ITV News. The announcement sparked outrage at the Labour Government’s creation of a “two-tier’ system that made some retirees more equal than others. Conservative peer Lord Mackinlay said the “two-tier taxation” would leave people questioning why they ever saved into a pension. Helen Morrissey, of Hargreaves Lansdown, called it “grossly unfair” on those who had. Exactly how much it will save those people on the lowest incomes remains unknown, and the Treasury doesn’t know how many people will actually benefit. But it does signal that, once again, Labour appears to be rewarding those who have put less into the system than others. Save for your future – and get punished Despite a manifesto promise not to raise taxes on working people, many feel the latest Budget did the exact opposite. Working people will pay more income tax, while savers and landlords will be subject to extra punishment. Conversely, some groups, most notably families with three or more children on benefits – and state pensioners with no private savings – will see their incomes rise. Extending the freeze on income tax thresholds to 2031 will hit anyone whose income exceeds £12,570 over the next six years, while the Chancellor’s £4.7bn raid on salary sacrifice schemes could cost some workers more than £50,000 in retirement. The frozen threshold also means that the state pension is certain to become taxable from April 2027, thanks to the payout’s 2.5pc minimum annual rise guaranteed by the triple lock. However, the Chancellor’s solution has been seen as another attack on the majority of state pension recipients who have squirrelled away extra cash into private or workplace pensions. Under the current proposal, anyone with any private pension savings at all would lose the entire tax-free entitlement. In effect, £1 of private income could cost them £58 in the first year it is introduced, rising to £188 by 2029. Not only does this create a chasm between how two retirees are taxed on the same chunk of pension income, but it also means a worker would pay more tax on their hard-earned income than a pensioner does on the same amount of state payout. Lord Mackinlay, a Conservative peer and former MP, said: “The elegant solution would have been to give everyone in the country a personal [tax-free] allowance reflecting the basic state pension. It would have been easy and fair. “But no, this Government has decided to introduce yet another two-tier taxation for those who have worked hard all their life and been diligent. People will ask, what’s the point in saving into a pension? Why did I bother? “This is where fiscal drag hits the road of reality for millions of taxpayers. This Labour Chancellor has created this.” The death of the deferred pension Those who are not in immediate need of the income when they reach state pension age – currently 66 but rising to 67 – because, for example, they are still in work, can choose to defer receiving their state pension. For every nine weeks you delay taking your pension, payments rise by an extra 1pc, the equivalent of 5.8pc a year. However, the Treasury has said that the tax exemption will only apply to people whose sole income is the state pension “without any increments”. This means that someone who decides to claim their state pension in April 2027, having deferred for five years, could pay almost £3,300 in tax by the end of the Parliament, even if they had no other income. By contrast, anyone who took their state pension as soon as they could, and had no other money set aside, would pay nothing, even though both pensioners are receiving the exact same pension entitlement. Hargreaves Lansdown’s Morrissey said the Chancellor’s “rushed announcement” would cause division and further confusion in an already complex system. She said: “It will be seen as grossly unfair for those pensioners who have income tax taken because they have contributed to a workplace or private pension. “Some of these pensioners may have incomes that are only fractionally higher and rightly feel aggrieved.” A second ‘triple lock’? Experts have also warned that the change could lead to a “second triple lock that no one dares switch off”. Despite being introduced as a temporary measure by the coalition government, the triple lock – which ensures pensions rise by the highest of wage growth, inflation or 2.5pc every April – has become a political albatross and remains in place. It has driven government spending on state pensions to £145.6bn a year, an annual cost that without urgent reform could hit £200bn by 2073. Former pensions minister Sir Steve Webb, now of consultancy LCP, said Reeves’s decision to provide tax-free state pensions to some could become a “second triple lock” for a select group. He said: “Once you’ve set this running, does it turn into another triple lock that no one dares switch off, further widening the tax divide between a select group of state pensioners and everyone else? “Do you eventually end up writing off tax bills of £500 or so, or do you switch this ‘tax amnesty’ off again?” An irreversible fault line Millions of people – mainly aged over 75 – have long felt the state pension system was already “two-tier”. Those who reached the age before April 6 2016 can claim a maximum of £9,175 a year without add-ons – around £2,000 a year less than those born later who qualify for the “new” single-tier state pension. But taxation is one aspect of the state’s retirement ecosystem that has remained constant throughout. With the state pension on course to rise slightly above the tax-free personal allowance in 2027-28, removing this small tax liability may be easier for the Government than abandoning the triple lock and reneging on a manifesto promise. But by removing it for some and not others, the Chancellor has carved a potentially irreversible fault line through the bedrock of British retirement. It may be politically expedient, but critics will, once again, surmise that Labour is taking aim at those who have been diligent enough to save for their own retirements.