The levy on state pensions should be lifted, saving pensioners around £1,000 a year in Income Tax, according to the Office of Tax Simplification (OTS).
Tax advisers for the Treasury said that the current rules for those in retirement are confusing and many feel that the deduction is unjust.
More than five million people on the basic state pension, worth £5,311 a year, currently pay Income Tax on the amount. They incur this cost as their other sources of income, such as private pensions and interest on savings, push their total earnings above the threshold.
The OTS has released its interim report looking at the impact of the current system and potential areas of reform.
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“Our report floats a number of possible ways forward to mitigate the difficulties pensioners face,” said John Whiting, Tax Director for the OTS. “We are aiming to make final recommendations that will mean pensioners can have a better understanding of a simpler tax system, and can deal with their responsibilities more easily.”
Although conclusive decisions are not put forward as to how to deal with this issue, one suggested option is to “exempt the state pension from tax altogether”.
Formal recommendations are expected to be made later this year. The Chancellor is likely to respond to this interim account during this month’s Budget.
