More than 400,000 pensioners will be forced to pay income tax this year due to the government’s freezing on thresholds, analysis shows.
An extra 1.2 million people over the age of 65 have been dragged above the personal tax-free allowance since the last general election, with more than 7.7 million now paying taxes on pensions and earnings, new official figures show.
That means millions of retirees with modest private pensions will lose pieces of next year’s 10-pc triple-slot state pension wage increase to the taxman – leaving them with a wage cut in real terms.
As the state pension, now worth more than £ 9,600 a year, comes closer to the personal allowance of £ 12,570, British pensioners pay as much as five times the tax rate they did a decade ago, the consultant’s analysis reveals LCP.
Pensioners, who were once handed an extra tax-free allowance, will now endure their biggest tax burden on record next year, the figures show.
A pensioner with a company pension to the value of the same as the state pension will pay £ 1 337 in income tax next April at an effective rate of 6.9 per cent, LCP found. The same retiree would have paid just £ 135 in taxes 10 years ago, equivalent to 1.2pc of income.
This is because the state pension is on track to rise by a record £ 1,000 next April, as the government has promised to keep its “triple lock” promise, which ensures that the benefit with the highest of inflation, wage growth or 2.5 pct. .
However, millions of pensioners will be caught in a sneak tax trap because the chancellor froze the personal allowance for five years. The threshold will usually rise with inflation to ensure that the overall tax burden does not grow as wages and pensions rise in line with rising prices.
That means 66-plus people will not get the full inflation-resistant boost designed to protect them from rising living costs. Instead, £ 200 of the £ 1,000 hump will be scraped back by the basic taxpayer and £ 400 for pensioners with incomes above £ 50,270.
An old-age allowance allows those between the ages of 65 and 74 to earn an extra £ 2 395 above the personal allowance before facing income tax, but the support has been abolished since 2013 by former chancellor George Osborne.
About 1.3 million working pensioners will also receive the new health and social care levy of 1.25 pct from next April. must pay.
Sir Steve Webb, former minister of pensions and now partner at LCP, has warned pensioners that the taxpayer will wait to “take his share” of their 10-piece triple-lock increase.
He said: “Where pensioners have incomes outside the state pension, they are likely to pay a much higher tax rate today than a decade ago, and this tax rate will rise even further in the coming years due to the freezing of tax allowances to the middle. 2020s ”.
Steven Cameron of Aegon, the pension group, said the Treasury’s five-year freeze on personal allowances was “unfair” during a time of high inflation and should now be reviewed.
He said: “It is very hard to try to pay taxes by freezing modest earners and the most vulnerable during the cost of living crisis by freezing personal allowances. It adds a very important burden to many. ”