Winter fuel U-turn could lead to ‘unfair’ and ‘complex’ tax system
Treasury calculations on savings made from a means-tested winter fuel payment for nine million pensioners may be significantly reduced due to a “new complexity in the tax system”, an economics think tank has warned.
The government has claimed that £1.25bn budgeting for winter fuel payments represents a cost reduction of up to £450m compared to the previous form of the benefit, pending confirmation from the fiscal watchdog, the Office for Budget Responsibility (OBR).
But economists at the think tank Resolution Foundation have warned that the payment for those below an income of £35,000 risks making the UK’s tax system more complex.
The Treasury has said that the payment will be made “automatically” as it will be collected via PAYE, otherwise HMRC’s tax system that also calculates returns Brits are eligible to receive, or via self-assessment.
Pensioners will also be able to opt out of the payment worth up to £300 each winter, which could save the government extra cash.
Alex Clegg, an economist at the Resolution Foundation, said the government’s U-turn on the benefit for pensioners was unlikely to yield the same levels of savings as Treasury officials estimated.
“This U-turn doesn’t represent a return to the status quo,” Clegg said.
“The new means-test will create new complexity in the tax system, including a cliff-edge for those with around £35,000 of income.
“The reported savings of £450m will be reduced further by the cost of increased pension credit take-up as a result of the original policy, and the cost of administering the new means-test.”
UK tax system among most complex
The comments echo an earlier warning made by the Institute for Fiscal Studies (IFS) before the return of winter fuel payments was announced.
IFS economist Jonathan Cribb said “administrative and hassle costs” risked mitigating the savings made from means-testing.
The UK is regarded to have one of the most complex tax systems among developed economies, with administration and compliance costing small businesses some £25bn this year according to a recent industry report.
Robert Salter of advisory firm Blick Rothenberg said: “Pensioners with an income of under £35,000 per annum will now qualify for the WFP, which is welcome news for many. However, this move will create more problems in the long term than it solves for both pensioners and the Revenue.”
He added: “Firstly this U-turn will create more unfairness in our tax system. A couple with each partner receiving an income of £30,000 each would qualify for the full WFP. But their fellow pensioners next door, with only one partner receiving an income of £36,000 in total, would get a much lower WFP, even though that second couple’s combined income is much smaller.
“The mechanism to ‘clawback’ where payment is not due, is similar to the High-Income Child Benefit Charge (HICBC), which has been fraught with difficulties and complexities. Pensioners who are close to the threshold might consider whether they are better off opting out rather than risk being drawn into the self-assessment system.”
HMRC is set to undergo vast reform under Labour, with technology and AI tools set to be integrated into tax systems in a government-led attempt to make services more efficient.
Tax hike fears rise
The fresh commitment will only add to costs Chancellor Reeves will have to cover with spending cuts in other departments, extra borrowing or further tax hikes.
James Smith, an economist at ING, suggested the policy reversal on winter fuel payments was symbolic of growing spending pressures across the board.
“I think there’ll be a growing recognition that there’s a shortfall in terms of the amount of headroom available to the government,” he told CityAM.
“I think most people would probably say they have to raise taxes again. I suppose if we were to see the government taking the alternative route, which would be to change the fiscal rules and basically to give themselves more fiscal space, then I would imagine that would be less palatable to markets come the autumn.”
ING analysis suggests the government could raise £9bn by extending a freeze on income tax thresholds, which has been labelled as a “stealth tax” that could force more pensioners to pay into government coffers.
It also suggested that a one per cent in crease in the 20 per cent rate of VAT would raise £10bn while more moderate tax hikes, such as a single percentage point hike ot the higher rate of income tax, would yield an extra £2bn.
Small sums of savings could help the government avoid having to build back £20bn through tax hikes, a similar amount of cash Chancellor Reeves said had been left by her predecessor Jeremy Hunt’s so-called “black hole” after the Conservatives left Downing Street in the middle of last year.