Most pensioners will be dragged into paying income tax within the next five years, experts have warned.
The combination of large increases to the state pension in line with the triple lock coupled with a freeze on tax thresholds means that even pensioners whose only income is the state pension will soon be paying tax according to financial analysts, who say that a large slice of the triple lock pay rise announced in Jeremy Hunt's Autumn Statement will be eaten up by income tax. And pensioners won’t see any of the benefits of the cut to National Insurance, because the over-66s do not pay it.
Analysis for Telegraph Money by pensions consultancy Lane Clark and Peacock shows that 8.5 million people aged 65 and over now pay income tax, 770,000 of who were dragged into paying tax after the triple lock boosted the state pension by 10.1% in April.
Next April, a further 650,000 pensioners could be taxed thanks to the 8.5% increase. That’s a total of 9m out of Britain’s 12.6m state pensioners, or nearly three quarters of retired people who have reached state pension age. This compares to fewer than 5m in 2010 and less than 3m 30 years ago.
The triple lock guarantees to increase the state pension every year using the highest of either inflation, wages or 2.5%. Office for Budget Responsibility (OBR) forecasts reveal that the new state pension is now expected to rise from just over £11,500 next year to around £12,800 in 2028 – meaning it crosses the personal allowance tax threshold. of £12,570.
And those who have saved into a private pension are being taxed more than ever before, as the decision to freeze the personal tax-free allowance until 2028 while increasing the state pension means that it doesn’t take much of a private pension to end up with a tax bill at the end of the year. Of the 12m pensioners in the UK, only 1m rely solely on the state pension, meaning there are more than 11m pensioners at risk of tax bills because of the extra income they saved for.
Claire Trott, a pensions expert at wealth manager St James’s Place, told The Telegraph: “Those who have saved for their retirement and have other income, or are in fact still working, won’t see the whole benefit of this increase due to the frozen personal allowances and tax bands. This would be exacerbated for those who have more private income and fall into higher rate bands.”
A retired person who collects the full new state pension and a £5,000 private pension income currently pays around £613 a year in tax. Next year, the triple lock rise means they will end up paying £794 in tax.
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