State Pension Inequality: State pension inequality in the UK has become a growing concern, particularly for older retirees, many of whom are unexpectedly being taxed on their pensions. This issue is especially pressing for people over the age of 85, with nearly half now paying income tax on their state pensions—despite many believing their retirement income would be tax-free. The combination of outdated pension schemes, frozen personal allowances, and lack of public awareness has created a situation many view as deeply unfair. In this article, we’ll explore why this is happening, what it means for pensioners, and what steps individuals and policymakers can take to address the issue.
State Pension Inequality
State pension inequality is not just a bureaucratic issue—it affects real lives, especially those of our oldest citizens. The tax system, designed with working adults in mind, now punishes retirees with complex forms, frozen allowances, and outdated structures. Whether you’re retired or approaching retirement, being informed is your best defence. Campaigns like WASPI continue to shine a light on these injustices. Meanwhile, it’s up to each of us to navigate the system with care—and help others who may not be equipped to do so.
| Issue | Details |
|---|---|
| High Tax Rates for Over-85s | 46% of pensioners aged 85–89 and 45% aged 90+ now pay income tax on state pensions. |
| Personal Allowance Freeze | The tax-free personal allowance (£12,570) is frozen until 2028. |
| Outdated Pension Systems | Older retirees receive higher pensions under legacy schemes like SERPS. |
| Triple Lock Effect | Pension increases (8.5% in April 2024) push many above the tax threshold. |
| Emergency Tax Codes | Over £44 million reclaimed from overpaid pension tax in Q1 2025 alone. |
| WASPI Women | Nearly 3.8 million women born in the 1950s affected by poorly communicated pension age changes. |
| Penalties from HMRC | Late self-assessments may incur up to £1,600 in fines. |
| Official Resource | Gov.uk – State Pension and Tax |
Why Are Older Pensioners Paying More Tax Than Expected?
Many people assume their state pension is always tax-free. Unfortunately, this isn’t always the case. Pensioners who receive more than the personal allowance (£12,570 for the 2024/25 tax year) must pay income tax on the excess. The problem arises because older pensioners—especially those over 85—are more likely to exceed this threshold due to:
- Legacy schemes like SERPS (State Earnings-Related Pension Scheme), which add extra income to the basic state pension.
- A frozen personal allowance, which is not keeping up with pension increases.
- The triple lock policy, which guarantees that the state pension increases by inflation, earnings growth, or 2.5%—whichever is highest.
For instance, in April 2024, the full new state pension rose by 8.5%, reaching £11,502 annually—just £1,068 below the tax threshold. Add even a small occupational pension or savings interest, and a pensioner easily breaches the limit.
Understanding the Administrative Burden: Forms, Penalties, and Self-Assessment
Emergency Tax Codes
When retirees withdraw lump sums from private pensions, HMRC often applies an emergency tax code. This results in a higher-than-necessary tax deduction.
Between January and March 2025 alone, 15,856 pensioners reclaimed over £44 million in overpaid tax, according to HMRC data.
To reclaim overpaid tax, pensioners need to submit one of the following:
- Form P55 – if part of a pension was taken and the fund still contains money.
- Form P50Z – if the pension was fully withdrawn and no other income exists.
- Form P53Z – if other taxable income was received that tax year.
Self-Assessment Confusion
Older pensioners are increasingly being pushed into the self-assessment system, which many find confusing. Those unfamiliar with online tax forms or without internet access are particularly disadvantaged. Missing a self-assessment deadline can incur:
- £100 automatic fine for late submission
- £10 per day after three months (up to £900)
- 5% of unpaid tax (or £300 minimum) after six and twelve months
The Human Cost: A Real-World Case Study
Margaret, 88, from Nottingham, had no idea she owed income tax until she received a letter from HMRC. Her state pension plus a small annuity put her £1,000 over the personal allowance. Confused and distressed, she faced a £600 bill and was required to submit a self-assessment form online—something she had never done in her life.
Cases like Margaret’s highlight how poorly communicated the tax implications of retirement income can be for the elderly. She eventually got help from her daughter, but not everyone has family support.
What is the WASPI Campaign and Why Does it Matter?
The Women Against State Pension Inequality (WASPI) group campaigns for justice for women born in the 1950s. They argue they were not given adequate notice when the state pension age increased from 60 to 65, and later to 66.
In 2024, the Parliamentary and Health Service Ombudsman ruled that the Department for Work and Pensions had failed in its duty to properly inform these women, recommending compensation between £1,000 and £2,950 per woman.
Despite this, the UK government has so far refused to commit to compensation, citing financial constraints. Over 3.8 million women are believed to be affected.
Expert Commentary
Sir Steve Webb, former pensions minister and partner at Lane Clark & Peacock, commented:
“The tax system was never designed with pensioners in mind. The freezing of allowances and overly complex systems like self-assessment are creating real hardship for older people. HMRC must do better.”
Implications for Future Retirees on State Pension Inequality
If you’re planning to retire in the next 5–10 years, this issue affects you too. Here’s what to consider:
- Don’t assume your state pension will be tax-free.
- Understand that additional income—even small amounts—can push you over the threshold.
- Plan ahead for the possibility of self-assessment requirements.
- Speak with a financial advisor to create a retirement income plan that minimizes unexpected tax bills.
Practical Advice for Pensioners
- Check Your Tax Code
Visit Gov.uk to ensure your tax code is correct. An incorrect code can cause overpayment. - Monitor Income Sources
Add up all your income: state pension, workplace pensions, annuities, savings interest, etc. - Reclaim Overpaid Tax
If you’ve been overcharged, file the correct form (P55, P53Z, or P50Z) through the HMRC portal. - Get Help with Self-Assessment
Consider contacting a tax adviser or using HMRC’s phone support if online filing is difficult. - Join Advocacy Groups
Groups like WASPI and Age UK provide support, updates, and lobbying power.
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Frequently Asked Questions (FAQs)
Q: Is the state pension taxable in the UK?
A: Yes. If your total income exceeds the personal allowance (£12,570), you’ll pay income tax on the excess.
Q: Why are people over 85 being taxed more often?
A: They often receive higher state pensions under older schemes like SERPS, pushing them above the tax threshold.
Q: Can I reclaim overpaid tax on my pension?
A: Yes. Use forms P55, P50Z, or P53Z to reclaim overpaid tax from HMRC.
Q: What is SERPS?
A: The State Earnings-Related Pension Scheme was a top-up to the basic state pension, phased out in 2002.
Q: Has the government agreed to compensate WASPI women?
A: No. Despite the Ombudsman’s findings, no compensation scheme has been approved yet.
