The number of Britons of pensionable age paying State Income Tax has increased substantially over the past year, according to new figures released by HM Revenue and Customs (HMRC).
Figures from the Inland Revenue found that annual figures for the number of people paying income tax on pension payments jumped by 660,000, from 7.85 million to 8.51 million.
More and more pensioners are being pushed into higher tax brackets due to the impact of the fiscal brake, where allowances are frozen at a time when incomes are rising.
Chancellor Jeremy Hunt has reiterated his intention to keep the current tax thresholds frozen until at least 2028, with Labor refusing to commit to ending the freeze if it wins next week’s general election.
The fiscal drag has been described as a ‘hidden tax’, with more people losing their hard-earned money to HMRC as a result of a policy decision by the Treasury.
Last night (June 27), Prime Minister Rishi Sunak said older Britons would be hit with a “pension tax” for the first time if Sir Keir Starmer’s party wins the keys to 10 Downing Street.
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Young and older Brits pay higher taxes due to fiscal drag
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However, Sunak’s claim that a future Labor government would ensure that “the state pension will be subject to pension tax” has been widely verified as inaccurate.
Currently, pensioners are only expected to start paying tax on their state pension until the 2027-28 tax year, as the payment is expected to exceed the Personal Savings Allowance, which is currently set at £12,750.
Under the triple lock, which both Labor and the Conservative Party have promised to maintain, state pensions are guaranteed to rise annually by either the rate of inflation, average earnings or 2.5 per cent; whichever is higher.
Hunt’s decision to freeze tax credits puts more older households in higher tax brackets, with pensioners on lower incomes now facing losing money to HMRC as they are more likely to rely solely on the state pension.
Ahead of voters heading to the polls on July 6, the Conservatives introduced a “triple plus lock” which would ensure that the tax-free pension allowance increases each year in line with any triple lock.
However, the analysis suggested that pensioners would save just £28 a month on their pension income if the policy is eventually introduced. Labour, which is leading the polls and expected to have a majority government, has not said it will maintain the policy.
Research by former pensions minister Sir Steve Webb has found that almost 2.5 million people will still pay tax on their state pensions even if the “triple lock plus” is introduced.
Webb explained: “This new data from HMRC is very timely and is helping to inform the debate on pensioners and tax.
“They show that the combination of frozen tax thresholds and a significant increase in the state pension means that the number of pensioners paying tax continues to rise.
“However, this is a continuation of a long-term trend where the number of over-65s paying tax has increased by around 4 million since 2010/11. For pensioners in Britain, being an income tax payer is now the norm rather than the exception.” .”
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Reacting to the new HMRC figures, economic commentator Chris Giles said: “Of course the State Pension has always been subject to tax… and it will be in the future whoever wins the election.”
Voters have also taken to social media to share how they have been affected by this ‘hidden tax’ on pensions, with many calling the country’s Prime Minister a ‘lie’.
One social media user said: “My dad along with over a million others pay tax on his state pension – so Sunak is a liar.”
Another added: “Sunak says this knowing that it only applies to people who live on the state pension and have no other sources of income. If you have a total income above the personal allowance you already pay tax as a pensioner. Deliberately dishonest.”
A government spokesman said: “Our triple lock led to the largest increase in the state pension in history last year.
“In April we are delivering a further increase of 8.5 per cent, taking the basic state pension £3,700 higher than in 2010. This is well above inflation, which is forecast to fall below the two per cent target in the second quarter of this year,” he added. according to independent FIG.
“We’re also curbing inflation to help everyone’s money go further, increasing Pension Credit – an average of £3,900 a year for pensioners on the lowest incomes – and this winter we’ve given more than 11.9 million pensioners a cost of living payment to help with essential costs . .”