The average pensioner household’s tax bill will top £5,308 this year, up seven percent on last year’s £4,961, according to new analysis from self-invested personal pension provider iSIPP. Of this, around 70 percent is paid as income tax with the remainder coming from council tax. Indirect taxes such as VAT will add to the bill but aren’t included in these figures.
The average pre-tax income among retired households is now £33,997 a year, an increase of £1,732 from last year’s £32,265.
That is a rise of 5.3 percent but the tax take has actually increased by seven percent because of Prime Minister Rishi Sunak and Chancellor Jeremy Hunt’s move to freeze personal tax thresholds all the way through to April 2028.
Hrishi Kulkarni, managing director of iSIPP, said pensioners will pay an extra £6.2billion in total extra tax this year. “The decision not to uprate income tax thresholds in line with inflation means more people are paying tax at higher rates, including retired households.”
Britons no longer have to pay National Insurance (NI) once they hit state pension age. However, some pensioner households may pay if one partner is below the retirement age, and they will also be hit by the tax-band freeze which applies to NI.
Sunak and Hunt have also frozen the inheritance tax (IHT) threshold until 2028 and bills are set to rise by an extra £1billion this year alone, to more than £7billion.
This will catch more middle income families but careful planning can limit your exposure.
Hunt slashed the capital gains tax (CGT) annual exemption from £12,300 to £6,000 in April. Next April, it will fall again to just £3,000.
CGT bills are set to double as a result but there is plenty you can do to reduce the impact.
Pensioners who hold shares outside of the tax-free Isa wrapper will also pay more tax, as the tax-free dividend allowance has been halved from £2,000 to £1,000, and will be cut again next April to £500.
Council tax bills are rising, too, with the majority of local authorities hiking rates by five percent from April.
Yet some pensioners and people on low incomes don’t need to pay council tax at all. See if you are eligible for Council Tax Reduction or the single person’s discount.
A growing numbers of pensioner savers are also exceeding their annual Personal Savings Allowance (PSA). This allows basic rate taxpayers to take £1,000 of savings interest free of tax each year, falling to £500 for higher rate taxpayers.
As best buy savings accounts now pay up to six percent, a basic rate tax payer with just £17,000 in the bank could exceed their PSA and pay income tax on the surplus interest.
READ MORE: ‘Tax cuts off the table as Britain heads for recession’
Best buy cash Isas pay slightly lower rates of interest than standard savings accounts. However, it is all tax free inside your annual £20,000 allowance, so worth considering for those who have breached their PSA.
Lower earners may benefit from the starting rate for savings, which allows another £5,000 of tax-free savings interest on top of the PSA.
Alternatively, gilts offer returns of up to 5.58 per cent and can be tax-efficient for higher-rate taxpayers.
Sunak and Hunt’s multi-pronged tax onslaught is hitting pensioners on every front and even next year’s state pension hike will have a sting in the tail.
If the new state pension increases by 8.5 percent under the triple lock to £11,502.40 a year, it will push more pensioners closer to the frozen personal allowance threshold of £12,570.
This means they will only need to generate a small amount of income to start paying tax on it, pushing more into HMRC‘s clutches.
Pensioners will continue to hand over a higher proportion of their income every year while the personal tax freeze lasts.
Kulkarni said: “It is important however that retired households budget for their tax bills and maximise tax-free savings where possible.”
