The Government’s failure to join up policies makes many pensioners liable for income tax for the first time next year.
As tax thresholds remain frozen until 2027/2028, anyone with an income of more than £242 a week, or £12,570 a year next year, will be liable for tax.
The freeze is said to generate approximately £50billion for the Government, with the burden falling disproportionately on people on relatively low incomes, including many pensioners, according to the Institute for Fiscal Studies.
The state pension has always been less than the income tax threshold, unless people had substantial private or employer pensions, however for many this is about to change.
Figures from LCP suggest that there will be around 650,000 extra pensioners who will be forced into paying tax as their income will exceed the personal allowance next tax year.
The state pension is set to jump by 8.5 percent due to rising wage growth.
This means the full new state pension – paid to those who reached state pension age after April 2016 – will increase by more than £900 a year to £11,502. The basic state pension will rise to £8,814.
As the state pension increases, that additional income will take more people above this threshold for the first time.
The bumper increase next year is thanks to the triple lock mechanism, which guarantees an annual increase in the state pension of 2.5 percent, wage growth or inflation – whichever is higher.
While pensioners and those approaching retirement will be cheering the 8.5 percent rise – the second-biggest increase to the state pension – many will be dragged into the income tax net and will have to start paying tax on their income.
The state pension will take up 92 percent of the personal allowance, with pensioners just needing an additional £1,068 of income to cross the tax threshold.
Between 2022-23 and 2023-24, HMRC figures suggest that the number of those aged 65 and over who pay income tax rose from 7.73million to 8.5million, due to the 10.1 percent increase in the state pension in April 2023.
According to LCP, a further rise of 8.5 percent in the state pension will likely result in an extra 650,000 pensioners paying tax, taking the total to 9.15million in the 2024-25 tax year. In contrast, only about 4.5million over-65s paid income tax in 2010.
HM Revenue and Customs, who assess and collect tax, have not collected tax from these people in the past. And they have never had a system for making PAYE deductions from the state pension.
So it is likely that people affected will only know about the change when they receive a demand for tax from HMRC at the end of the tax year, in April 2025.
A Treasury spokesperson said: “The best tax cut we can provide right now is to halve inflation, which we’re on track to do this year as long as we stick to our plan.”
