State pension shock as millions of retirees will pay income tax despite triple lock pledge | Personal Finance | Finance

The Tory Party’s six-year freeze on income tax thresholds is steadily pushing more pensioners into HMRC’s clutches. Since the Conservatives took power in 2010, the number of over 65s paying income tax has increased by a staggering two thirds.

Eight million of the nation’s 12 million pensioners now pay income tax. Another 650,000 will start paying this year.

That figure will have climbed to 1.6million by the time the tax threshold freeze ends in the 2028/29 tax year. They’ll pay an extra £1,000 a year income tax on average.

The national insurance (NI) threshold has also been frozen, although this has been less of an issue because pensioners do not pay NI.

However, it does mean they missed out on Chancellor Jeremy Hunt’s double NI cut, designed to offset some of the damage. This will save more than 27million workers £900 a year on average, but offers nothing to pensioners.

PM Rishi Sunak has not totally abandoned pensioners. While both parties have pledged to support the state pension triple lock, he has gone a step further with his triple-lock-plus policy.

This pledges to increase the £12,570 personal allowance in line with inflation, earnings or 2.5 percent, whichever is highest. If implemented, this should save pensioners an estimated £100 next year, rising to £275 by 2030.

Labour has refused to match this pledge.

If the new state pension, which currently pays up to £11,502 a year, increases by five percent over the next two years, it will breach the personal allowance, forcing millions to pay income tax on their state pension.

This would be a political, financial and administrative nightmare. But new research from consultancy LCP shows it’s already happening.

Its analysis of DWP figures suggests that a staggering 2.5million already pay income tax on their state pensions.

Typically, these are older pensioners, who retired before April 6, 2016 on the old basic state pension.

This pays a much lower headline income of £8,814 a year for those who get the full rate. That’s £2,688 below the maximum new state pension sum of £11,502.

This is a regular a source of grievance for older pensioners who feel short changed by our two-tier state pension system.

However, many on the basic state pension actually get more, because it is topped up by additional state pension, such as the state-earnings related pension scheme (Serps) and state second pension (S2P).

And they’re paying income tax on it today, thanks to the personal allowance freeze.

Former Pensions Minister Steve Webb, now working as a partner at consultancy LCP, said there is huge diversity in the type and size of state pension people receive.

While 3.2 million get the new state pension, which is simpler, 8.4 million older pensioners get the basic state pension, which is far more complex.

Additional state pension can increase its value by up to £200 a week, Webb said. “Some of the largest state pensions are paid to those who come under the old system and have large Serps entitlement.”

Around 2.1 million on the basic pension pay income tax on it as a result.

Some on the new state pension also receive more because they built up transitional protection of accrued rights prior to 2016. Around 350,000 are paying income tax on their state pension, too.

Webb said Sunak’s triple-lock-plus pledge will reduce their income tax bills but more than one in five will pay anyway. But they’ll pay a lot more income tax if Labour wins.

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