As someone who is approaching State Pension age, the debate over the Winter Fuel Payment (WFP) has had a clear resonance for me. But I fear that we may be ending up in yet another muddled tax policy position.
The WFP was introduced in 1997, and was originally £20 (£50 for those on means-tested benefits). By 2003/04, it had been increased to £200 for those under 80 and £300 for those above, and stayed at that level for most of the period to 2024, when Rachel Reeves announced that eligibility would be restricted to those receiving Pension Credit. It is currently a tax-free benefit, but like the Christmas Bonus (set at £10 in 1972 and never increased since) it is not routinely index-linked.
The Chancellor appears to have calculated that her promise to retain the Triple Lock until the end of this Parliament more than outweighed the loss of the WFP. In arithmetical terms, she is right: the new State Pension rose by £472 in April 2025, and the old Basic State Pension (still relevant to those who retired before 2016) rose by £365. However, the reaction to the restriction of WFP to those on the lowest incomes has provoked prolonged outrage, proving yet again that it is relatively easy to introduce a tax benefit but very hard to take it away.
Recent comments by the Prime Minister suggest that a rethink is underway. Sir Keir has said that the policy will be changed at the Autumn Budget, but cautioned that Ministers would only ‘make decisions we can afford.’ The BBC described this as a U-turn (Paul Sneddon, 21 May 2025). It is not yet clear what changes will be made, or whether they will be in time for relevant payments to be reinstated for this winter. The simplest solution would, of course, be to restore the payment as a universal benefit, but this would significantly undermine the message of the previous Budget, as well as being costly (the original policy was estimated to save about £1.5bn per year). The Financial Times reports that creating a new means test would be highly complex, and has suggested that ministers are considering a ‘simpler solution’, which would involve recouping the money from higher income pensioners through their tax returns (‘UK considers taxing pensioners to claw back winter fuel payments’ (George Parker & Emma Agyemang), 24 May 2025).
Unfortunately, this sounds as if the lessons of the High Income Child Benefit Charge have not only not been learned, but that the same mistakes are about to be repeated. Clawing back the benefit in this way would arguably be just as complex as a new means test, and ignores the fact that a large majority of higher income pensioners are not currently required to complete a tax return. Mistakes and confusion would be inevitable, and in a few years we would see yet more tribunal cases over relatively small sums of money, including penalties levied on those who did not appreciate that they needed to report and repay their WFP.
The underlying issue is that politicians appear to be viewing each small piece of the tax system as something which needs to be fair in its own right. Instead, a more holistic approach would look at how the tax system as a whole affects a particular group (such as pensioners) and ensure that the overall result is reasonable. The elephant in the room is the increasing cost of the Triple Lock. I hate to say ‘I told you so,’ but I wrote about this issue for Tax Journal (22 September 2023): as I said then, a much better approach would be to target a particular level of pension tied to median or average earnings, and to set out a path to reach that. In an article in December 2023, Carl Emmerson of the IFS noted that Australia has adopted a policy along these lines, with their pension now guaranteed to increase over the long term in line with average earnings, with an annual increase at least in line with inflation (‘Pensioners deserve better than the triple lock’, The Telegraph, 13 December 2023).
If such a reform were to be implemented, then it would surely be feasible to sweep the WFP and the Christmas Bonus into the overall State Pension, ensuring that they benefit from uprating in future – if the original £10 Christmas Bonus had been index-linked since it was introduced, it would now be £118! For those who say that the separate payment of WFP is important for those worried about heating their homes over the winter, there would be nothing to stop the November State Pension payment being a higher amount than the regular monthly (or rather, four-weekly) payments.
This is unlikely to be feasible in this Parliament, given the promise to preserve the Triple Lock. In the shorter term, I think a better solution would be firstly to make the payment taxable and then to adjust general tax thresholds to balance the books. This would not be a perfect solution, but would be considerably simpler and would achieve the main part of the policy aims.
On the other hand, if the Chancellor and Prime Minister persist in ‘taking tough decisions’ but then backing down in the face of protests, we will end up in a similar position to Denmark, where it has just been announced that the State Pension age will increase to 70 from 2040. Somehow, I don’t think that would be popular.
As someone who is approaching State Pension age, the debate over the Winter Fuel Payment (WFP) has had a clear resonance for me. But I fear that we may be ending up in yet another muddled tax policy position.
The WFP was introduced in 1997, and was originally £20 (£50 for those on means-tested benefits). By 2003/04, it had been increased to £200 for those under 80 and £300 for those above, and stayed at that level for most of the period to 2024, when Rachel Reeves announced that eligibility would be restricted to those receiving Pension Credit. It is currently a tax-free benefit, but like the Christmas Bonus (set at £10 in 1972 and never increased since) it is not routinely index-linked.
The Chancellor appears to have calculated that her promise to retain the Triple Lock until the end of this Parliament more than outweighed the loss of the WFP. In arithmetical terms, she is right: the new State Pension rose by £472 in April 2025, and the old Basic State Pension (still relevant to those who retired before 2016) rose by £365. However, the reaction to the restriction of WFP to those on the lowest incomes has provoked prolonged outrage, proving yet again that it is relatively easy to introduce a tax benefit but very hard to take it away.
Recent comments by the Prime Minister suggest that a rethink is underway. Sir Keir has said that the policy will be changed at the Autumn Budget, but cautioned that Ministers would only ‘make decisions we can afford.’ The BBC described this as a U-turn (Paul Sneddon, 21 May 2025). It is not yet clear what changes will be made, or whether they will be in time for relevant payments to be reinstated for this winter. The simplest solution would, of course, be to restore the payment as a universal benefit, but this would significantly undermine the message of the previous Budget, as well as being costly (the original policy was estimated to save about £1.5bn per year). The Financial Times reports that creating a new means test would be highly complex, and has suggested that ministers are considering a ‘simpler solution’, which would involve recouping the money from higher income pensioners through their tax returns (‘UK considers taxing pensioners to claw back winter fuel payments’ (George Parker & Emma Agyemang), 24 May 2025).
Unfortunately, this sounds as if the lessons of the High Income Child Benefit Charge have not only not been learned, but that the same mistakes are about to be repeated. Clawing back the benefit in this way would arguably be just as complex as a new means test, and ignores the fact that a large majority of higher income pensioners are not currently required to complete a tax return. Mistakes and confusion would be inevitable, and in a few years we would see yet more tribunal cases over relatively small sums of money, including penalties levied on those who did not appreciate that they needed to report and repay their WFP.
The underlying issue is that politicians appear to be viewing each small piece of the tax system as something which needs to be fair in its own right. Instead, a more holistic approach would look at how the tax system as a whole affects a particular group (such as pensioners) and ensure that the overall result is reasonable. The elephant in the room is the increasing cost of the Triple Lock. I hate to say ‘I told you so,’ but I wrote about this issue for Tax Journal (22 September 2023): as I said then, a much better approach would be to target a particular level of pension tied to median or average earnings, and to set out a path to reach that. In an article in December 2023, Carl Emmerson of the IFS noted that Australia has adopted a policy along these lines, with their pension now guaranteed to increase over the long term in line with average earnings, with an annual increase at least in line with inflation (‘Pensioners deserve better than the triple lock’, The Telegraph, 13 December 2023).
If such a reform were to be implemented, then it would surely be feasible to sweep the WFP and the Christmas Bonus into the overall State Pension, ensuring that they benefit from uprating in future – if the original £10 Christmas Bonus had been index-linked since it was introduced, it would now be £118! For those who say that the separate payment of WFP is important for those worried about heating their homes over the winter, there would be nothing to stop the November State Pension payment being a higher amount than the regular monthly (or rather, four-weekly) payments.
This is unlikely to be feasible in this Parliament, given the promise to preserve the Triple Lock. In the shorter term, I think a better solution would be firstly to make the payment taxable and then to adjust general tax thresholds to balance the books. This would not be a perfect solution, but would be considerably simpler and would achieve the main part of the policy aims.
On the other hand, if the Chancellor and Prime Minister persist in ‘taking tough decisions’ but then backing down in the face of protests, we will end up in a similar position to Denmark, where it has just been announced that the State Pension age will increase to 70 from 2040. Somehow, I don’t think that would be popular.
