What a bugger’s muddle.’ That is the term my late mother would have used to describe Labour’s decision on Monday to unravel last year’s clampdown on winter fuel payments to pensioners.
And it is a phrase that keeps crashing into my mind as I get to grips with the financial mechanics behind Labour’s decision to rip up last year’s rules governing who does and who doesn’t get the payment – and start all over again.
Alongside ‘bugger’s muddle’ come competing thoughts such as ‘political ineptness of the first order’, ‘Rachel from Accounts, resign’, and ‘someone’s going to have to pay for this spectacular policy U-turn’.
Yes, readers, that’s us: people, young and old, of modest wealth, who have always done the right thing and saved for the future.
However right and fair the U-turn is on the winter fuel payment, it increases the prospect of more taxes coming our way in the Budget – as sure as ‘from Accounts’ follows ‘Rachel’.
In a nutshell, Monday’s volte-face on the winter fuel payment is good news for 9 million pensioners who live in England and Wales (the system in Scotland and Northern Ireland works differently). Come this winter, they will receive an annual payment worth up to £300.
But it is bad news for 2 million ‘well-off’ pensioners with annual income in excess of £35,000 – rich people, in the eyes of Pensions Minister Torsten Bell (really?).
They will still be denied the payment, although as I explain later, it’s not quite as simple as that. Most will get it and then have to hand it back. Yes, you couldn’t make it up. Policy belonging on Planet Zog.
To put these figures into perspective, 10 million pensioners were stripped of the winter fuel payment last year as a result of the Chancellor’s first major policy decision in office – with only those claiming pension credit qualifying for it.
So, rather than the £1.5 billion annual saving that Rachel from Accounts boasted about last year, we’re now talking about a more modest £450 million – although some experts believe this sum could easily be eaten into by the cost of administering the new (complicated) payment system.
So, how will the new winter fuel payment work, how much will you get and are there ways of ensuring you keep it even though your annual income is just above the £35,000 threshold.
I will try to explain as best as I can, but some of the key details have yet to be worked out by Treasury officials. Policy off the hoof.
Who will qualify for winter fuel payment later this year?
All pensioner households will receive a winter fuel payment of up to £300 – although some will then have to hand it back.
To qualify for the payment, a member of the household must have reached state pension age no later than September 21 this year. This will trigger a £200 payment, although it jumps to £300 if someone is aged 80-plus.
The payment is household- based. So, if a couple are both of state pension age and under the age of 80, they will receive £200 between them (not £200 each). The same £200 will be received if only one of them has hit state pension age.
But if one of them is 80 or over, they will get the higher household payment of £300.
For pensioners living alone, they will also get £200 unless they are age 80 or over, in which case they receive £300.
The payment of £200 is made to the first person who reaches state pension age. When the second householder hits pension age, the payment is then split 50:50.
When the first pensioner passes age 80, they get an extra £100, taking the combined household payment to £300. When both are aged 80 plus, each gets £150.
So, who will get it only to then lose it?
Those pensioners who have annual income of £35,000 or more will receive the payment – and then have it taken away through the tax system. Some 2 million pensioners will be caught up in this messy process.
For this winter’s payment, it is the annual income in the current tax year (ending April 5, 2026) that will be used to determine whether a pensioner keeps the £200 or £300 – or has to hand it back (or a slice of it) through tax.
The process is a wee bit complicated, given winter fuel payment is household-based. But the following examples will help you get to grips with it all – as will the graphic overleaf.
Example 1: For a household where a couple are both of state pension age, but below age 80, they will receive a combined winter fuel payment of £200.
If one of them has taxable income of £35,000 or more, he or she will have their 50 per cent share of the payment (£100) clawed back through the tax system. This will be done in the following tax year (starting April 6, 2026), either through pay as you earn (PAYE) or self-assessment.
Their partner, however, will keep their £100 slice of the winter fuel payment – and it will be tax-free. If both have taxable incomes of £35,000 or more, they will each have their £100 payments recovered by HM Revenue & Customs (HMRC).
Example 2: For a household where a couple are both aged 80 or over, they will get a winter fuel payment of £300.
If one of them has annual taxable income in excess of the £35,000 threshold, he or she will receive £150 of winter fuel payment and then ‘lose it’ in subsequent tax. The partner will keep their £150.
If both have incomes above £35,000, they will each lose their £150 payments to tax.
Example 3: Finally, for a household where a married couple are both of state pension but one is above the age of 80, they will get a winter fuel payment of £300.
If the older pensioner has annual income in excess of the £35,000 threshold, he or she will receive £200 of winter fuel payment and then ‘lose it’ in subsequent tax. The partner will keep their £100.
If it’s the younger pensioner with the £35,000-plus of taxable income, they will receive £100 of payment which will then be recovered by the taxman. The older partner hangs on to their £200.
One further point of clarity. If a household comprises one person who has reached state pension age – and one who hasn’t – the latter’s income is not a factor in determining the household’s right to the winter fuel payment and whether it will be clawed back. It is based on the pensioner’s age and their income alone.
Is this system fair?
Not really. It’s crude. Take the example of a pensioner couple who both receive annual income of £30,000 in the current tax year.
Assuming they are both under the age of 80, this means they will obtain £200 of winter fuel payment (£100 each) and get to keep it. This is because both incomes are below the £35,000 threshold for claw-back of the payment.
In contrast, their pensioner neighbours (again, assuming both aged under 80) could have respective incomes of £36,000 and £24,000 – the same joint income as next door’s £60,000.
But because one of their incomes is above £35,000, they will lose half of their £200 winter fuel payment.
Remember, this is a cliff-edge tax hit. If your annual income is £34,999, you keep your winter fuel payment. But if it £35,001, you lose it. Brutal.
Are there ways to protect your winter fuel payment if your income is just above the £35,000 threshold?
Possibly. Your annual income is calculated by the taxman and incorporates all the taxable income you receive.
So, this means the state pension, any private pension (not tax-free cash), interest from savings (above the annual tax-free allowance of £1,000), dividends (above the £500 annual allowance) and income from a rental property.
Income from an individual savings account is not taxable income – it is tax-free.
So, if your annual income is usually around £35,000, and part of that is drawn from a pension as and when you need it, you could ensure any income drawdowns don’t just take you over the threshold. By doing this, you keep your winter fuel payment.
Another approach is to cut back on pension withdrawals just ahead of the tax year end to keep below the £35,000 threshold.
You could ensure all charitable donations are made by you rather than your partner on a lower income. This could reduce taxable income below £35,000, preventing the loss of the payment.
According to Robert Salter, a director of accountancy firm Blick Rothenberg, another approach worthy of consideration is to transfer assets so that the income they produce is attributed to the spouse with the lower annual income.
He adds: ‘Although it’s not possible to do this with someone’s private pension, it certainly makes sense with shares and investment funds that generate income. Such transfers are easy to do, although tax advice
is probably the best way to ensure they are watertight.’ Any tax is likely to be claimed back through the pay as you earn system (PAYE) – or through self-assessment.
If I am not interested in receiving the payment only for it to be clawed back, can I refuse to take it?
Yes. You will be able to opt out, removing the need for HMRC to snatch back the payment in tax. But as of yet, the required system enabling this is not up and running.
Former pensions minister Steve Webb says opting out could prove messy.
‘If someone has annual income in excess of £35,000 and decides to opt out, the system must ensure that the other householder, on a lower income, keeps their slice of winter fuel payment.’
We also don’t know yet whether people will be able to opt out of receiving the payment – and then opt back in if their finances take their income below £35,000.
What happens if someone dies before their winter fuel payment is recovered by the taxman? Will HMRC try to claim it back from the beneficiaries?
HMRC has said it will not ask for repayment if the only tax owed was for the winter fuel payment.
Further details on this may emerge in the coming weeks, providing 100 per cent clarity.
Will winter fuel payments be made in time for Christmas?
That's the plan. Liz Kendall, Secretary of State for Work and Pensions, says the necessary regulations will be laid before Parliament next month in July.
But Blick Rothenberg’s director Robert Salter says the new winter fuel payment system will create a lot of extra work for HMRC.
He adds: ‘My worry is that service levels in other areas of the Revenue will deteriorate as staff get diverted to cope with the new payment system.’
Two final points. One, the £35,000 threshold is unlikely to increase in the future, meaning more people over time will lose their entitlement to the winter fuel payment.
Secondly, if you have yet to check whether you qualify for pension credit, don’t delay because you now know that winter fuel payment is coming your way. Double up. Get both.
