One reason is that many pensioners are better off than they were, thanks to company and personal pensions, and the state pension triple lock. Another is that Hunt and Prime Minister Rishi Sunak have frozen the personal allowance at £12,570, all the way to 2028.
Up to a million pensioners now face paying income tax in retirement for the first time, and millions more will pay an increased amount.
It also raises a new problem. Thanks to the triple lock, the state pension has seen two bumper increases, of 10.1 percent in April this year and 8.5 percent next.
That will lift the new state pension to £11,501 a year, a mere £1,069 below the personal allowance. Two more annual hikes of around five percent each would tip the state pension over the personal allowance in 2026, at which point we enter uncharted territory. Would the Department for Work and Pensions (DWP) serve up the state pension, only for HM Revenue & Customs (HMRC) to snatch a chunk of it straight back?
On current trajectory, that’s exactly what is going to happen.
Around 12.6 million claim the state pension, of whom 8.1 million pay tax, said Andrew Tully, technical services director at advisors Nucleus Financial. “That’s an boost of almost 50 percent on a decade or so ago.”
Few pay tax on the state pension itself. Pensioners’ income tax bills are based on total earnings, including the state pension, but also workplace and personal pensions, and any earnings from a job. It is these that will be taxed.
Yet an convey reader wrote to point out that a small but rapidly growing group already get state pension that immediately tips them over the personal allowance.
They could face a real shock and their numbers are set to grow thanks to Hunt’s decision to freeze tax thresholds all the way to 2028.
Some who retired before April 6, 2016, already get more state pension than the personal allowance. They get the basic state pension, which currently pays up to 8,122.40 a year, against £10,600.20 on the new state pension.
However, many also get additional state pension on top, via the state earnings related pension scheme (Serps) or state second pension (S2P).
Figures are hard to come by but Tully said “reasonable numbers” are pushed over the personal allowance by the state pension alone. “This poses a problem, because HMRC has no way of deducting tax from the state pension.”
Our reader warned that pensioners affected by this face a shock tax demand from HMRC at the end of the year. Many won’t have the cash to pay it because they won’t have planned for it.
Stephen Lowe, group communications director at Just Group, said pensioners are right to be concerned. “Many who have never been taxed before won’t realise they need to start now, and could run into problems.”
They will acquire state pension one year and a tax demand the next, when the money is likely to have been spent. “As the government widens the tax net, it needs to ensure pensioners comprehend the process and it is fair,” Lowe added.
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Tom Selby, director of public policy at AJ Bell, said the government is giving with one hand by passing on triple lock hikes while taking with the other by freezing tax bands. “This is daft and risks landing even more low-income pensioners with a shock tax bill.”
He confirmed that those whose state pension exceeds the personal allowance and earn no other income will get a written tax demand from HMRC.
That is a letter nobody wants to acquire and Selby added: “It is ludicrous that low-income pensioner households risk being in this position, and yet another reason why Rishi Sunak’s income tax freeze needs to end.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, warned “state pension tax creep” is set to continue for another four tax years. “Many wholly reliant on basic state pension will need to fill in a self-assessment return every year to make sure they pay their tax.”
Morrissey added: “It’s a hugely complex system that many pensioners will not be aware of meaning they could find themselves landed with a bill they can ill afford to pay.”
There is one potential positive. If the state pension does exceed the personal allowance, it could force the Treasury to axe the hated threshold freeze. If that happened, the country would have state pensioners to thank for it.
