Exempting pensions from tax would benefit the rich, says Gov

Monday 21 October 2024

Exempting pensions from tax is “unaffordable” – and would end up benefiting the wealthy, Ministers have said in their response to a campaign backed by thousands of islanders.

Treasury Minister Elaine Millar said in a report that the tax exemption would cost at least £21 million per year – and not a penny of this “giveaway” would go towards pensioner households with the lowest incomes.

Ministers had already responded to Paul Traolic's petition 'Make states old age pensions exempt from tax', which was first published on 30 May and quickly garnered the required 1,000 signatures for a Ministerial response.

Mr Traolic's argument that taxing state pensions amounted to "double taxation" because pensioners had already paid tax throughout their life has since attracted 5,272 signatures as well as wider public support.

But Ministers have remained firm that they disagree with the notion, and following an in-committee discussion they have now published a report on the petition which sets out these reasons at length.

Pictured: Deputy Millar is the Treasury Minister.

Deputy Millar explained that the island's tax thresholds (£20,000 for single islanders) mean that pensioners do not pay income tax if the old age pension is their only source of income – and as a result, around 50% of pensioners do not pay income tax.

She said exempting the old age pension was "unaffordable", with an estimated cost of at least £21 million per year based on a 2022 assessment.

"None of this £21 million tax giveaway would go towards pensioner households with the lowest incomes," she said.

The report added: "The only way this reduction in revenue could be funded is through the Social Security Fund, meaning future pensioners could be deprived to fund current pensioners.

"As the Fund was depleted, action would need to be taken to increase contributions. The alternative would be to reduce public services other areas, possibly prejudicing other Islanders who need those services."

It added that the measure would result in "inter-generational unfairness" because "current and future taxpayers and pensioners would be in a worse financial position than the current generation of pensioners".

"The resulting loss in taxation would result in other groups, such as younger families, having to pay more in tax or social security contributions."

The report further explained that the proposal would form an "untargeted tax cut" for tax paying pensioners, including the wealthiest pensioners, but would "do nothing to help those on the lowest incomes, who are already outside the income tax net".

The report also added that this position of taxing islanders "broadly mirrors" that in the other Crown Dependencies and the UK.

In their previous response Ministers further explained that the way States pensions are funded is different from the way that private pensions are funded.

Unlike private pension schemes, States pensions are funded by a mix of islanders' social security contributions, employers' contributions, and the States Grant – which tops up contributions from islanders who make less that £65,400.