Millions more pensioners are being dragged into paying income tax amid state pension rate rises and frozen personal allowances, new data shows.
HMRC’s latest personal income statistics unveiled there were a staggering 6.74 million taxpayers of state pension age for the tax year 2021 to 2022.
The South East has the highest number of taxpayers of pension age and the largest amount of total income at 1.06 million and £33.8billion respectively. Meanwhile, Northern Ireland has the fewest taxpayers of pension age and the lowest amount of total income at 138,000 and £3.9billion respectively.
Around 4.5 million people of state pension age paid tax when the Conservative Party were voted back into power in 2010.
The new figures mark an increase of 4.3 percent compared to the previous tax year, and analysts warn the number has “likely grown considerably” in the years since.
In 2021/22, the full new state pension was £179.60 per week, or £9,339.20 per year, using 74 percent of the £12,570 personal allowance.
Since then, the personal allowance has remained frozen at the same level, while the state pension has risen substantially.
Jon Greer, head of retirement policy at Quilter, said: “The state pension will soon reach £221.20 per week or £11,502.40 per year in the 2024/25 tax year, leaving just over £1,000 of the personal allowance.
“This will no doubt see a considerable number of pensioners who have additional retirement income dragged into paying tax.
“The reality is that we are soon set to be in a perverse situation where pensioners might have to start paying back their state pension to HMRC because of frozen allowances, and our previous analysis found that pensioners could need to pay back a proportion of their state pension in income tax in just two years’ time.”
The triple lock, introduced in 2010 to ensure the state pension doesn’t lose value in real terms, increases the state pension by the higher of average earnings, inflation or 2.5 percent.
Due to the way the triple lock operates, Mr Greer also issued a grim warning: “If inflation or wage growth is over four percent for the next two tax years, the Government will need to start asking for some of its pension benefit back in tax unless it increases the personal allowance.”
Given that state pensions will shortly eradicate someone’s personal allowance, any private pension provision other than the tax-free cash lump sum will therefore become taxable at their highest marginal rate.
For many, Mr Greer noted that could mean “big tax bills” depending on how much they draw.
He continued: “Pensioners are often worst hit by frozen tax allowances because they typically will be getting their income from a number of different investments and therefore lean heavily on CGT and dividend allowances to help create a retirement income in addition to their pension.”
However, he noted: “The Government has made it very difficult to avert being taxed very heavily on these types of investments.
“It is incredibly important that people look across the spectrum of financial products that provide tax efficiency and use them in the right way and at the right time to try to prevent their income from being eroded by tax.
“Seeking professional financial advice can help someone make the most of their finances as current fiscal policy now mandates a different approach to financial planning.”
