Households are facing the prospect of repaying their Winter Fuel Payment as Chancellor Rachel Reeves prepares to unveil her budget later this week, which is anticipated to extend the freeze on tax thresholds until 2030. This move could effectively diminish the £200 to £300 Winter Fuel Payment designed to assist pensioners with heating costs, according to analysis by wealth manager Quilter.
Currently, the Winter Fuel Payment is available to those who have reached state pension age and is intended to help offset rising energy bills. However, projections indicate that the fiscal freeze, in combination with significant increases in state pensions due to the triple lock promise, could neutralize the benefits of this handout by the tax year 2029/30.
The triple lock policy guarantees that state pensions increase each year based on the highest of three metrics: inflation, wage growth, or a minimum of 2.5%. Next year’s state pension is confirmed to rise by 4.8%, and it’s projected that pensioners could see an increase of about 3% in the 2027/28 tax year. This could push the maximum state pension to around £13,623.83 by 2029/30, corresponding to a tax liability that effectively cancels out the Winter Fuel Payment for many.
In particular, Quilter indicates that by the 2027/28 tax year, the state pension may reach £12,968.98, resulting in a modest tax bill of £69.47 on excess income. This burden will likely increase in the following years, potentially leading to a tax obligation of £134.16 by 2028/29. Adam Cole, a retirement specialist at Quilter, highlighted that this freeze could undermine the intended support for vulnerable households, warning that many may ultimately forfeit their Winter Fuel Payment as a result of fiscal drag.
Further complicating matters, the Treasury has reaffirmed its commitment to the triple lock policy, leading to anticipated increases in both the new and old state pensions. The new state pension is expected to rise from £230.25 to £241.30 a week, while the old basic state pension will increase from £176.45 to £184.90.
Eligibility for the Winter Fuel Payment has changed significantly in recent years, now primarily limited to those receiving the state pension with an annual taxable income under £35,000. Notably, if one does not claim the State Pension or other qualifying benefits, an application is necessary to receive the Winter Fuel Payment.
In addition, as the budget announcement approaches, there are concerns over potential further tax implications, including rumored cuts to the current tax-free Isa allowance and potential increases in fuel duty, which could place additional financial strains on households.
As economic pressures continue to affect consumers, this potential policy shift serves as a reminder of the ongoing financial challenges faced by many, particularly those relying on pension income.