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More than 400,000 pensioners will be forced into paying income tax this year owing to the Government’s deep freeze on thresholds, analysis shows.
An extra 1.2 million over-65s have been dragged above the personal tax-free allowance since the last general election, with more than 7.7 million now paying tax on pensions and earnings, new official figures show.
It means millions of retirees with modest private pensions will lose chunks of next year’s 10pc triple-lock state pension pay rise to the taxman – leaving them with a pay cut in real terms.
As the state pension, now worth more than £9,600 a year, edges closer to the personal allowance of £12,570 British pensioners are paying as much as five times the rate of tax they did a decade ago, analysis from consultancy LCP reveals.
Pensioners, who once were handed an extra tax-free allowance, will now endure their largest tax burden on record next year due, the figures show.
A pensioner with a company pension worth the same as the state pension will pay £1,337 in income tax next April, at an effective rate of 6.9pc, LCP found. The same retiree would have paid just £135 in tax 10 years ago, equivalent to 1.2pc of income.
It comes as the state pension is on track to rise by a record £1,000 next April, as the Government has promised to honour its “triple lock” promise, which ensures that the benefit rises by the highest of inflation, wage growth or 2.5pc.
However, millions of pensioners will be caught in a stealth tax trap because the Chancellor has frozen the personal allowance for five years. The threshold would ordinarily rise with inflation to ensure the overall tax burden does not grow as wages and pensions increase in line with rising prices.
It means over-66s will not receive the full inflation-proofing boost, which is designed to protect them from the rising cost of living. Instead, £200 of the £1,000 bump will be clawed back by the taxman for basic rate taxpayers and £400 for pensioners with an income higher than £50,270.
An age allowance let those aged 65 to 74 earn an extra £2,395 on top of the personal allowance before they faced income tax, but the support was abolished by former Chancellor George Osborne from 2013.
Around 1.3 million working pensioners will also have to pay the new health and social care levy of 1.25pc from next April.
Sir Steve Webb, former pensions minister and now partner at LCP, warned pensioners the taxman will be waiting to “take his chunk” of their 10pc triple-lock rise.
He said: “Where pensioners have income apart from the state pension they are likely to be paying a much higher rate of tax today than a decade ago, and this tax rate will rise still further in coming years because of the freezing of tax allowances until the mid 2020s”.
Steven Cameron of Aegon, the pensions group, said the Treasury’s five-year freeze of the personal allowance was “unfair” during a time of high inflation and now needed to be reviewed.
He said: “It is very harsh to be roping modest earners and the most vulnerable during the cost of living crisis into paying tax by freezing the personal allowance. It is adding a very significant burden for many.”