More than one million pensioners now pay higher rate income tax as frozen thresholds continue to bite
Some 904,000 people of state pension age or older are now paying 40 per cent income tax while 124,000 are paying 45 per cent, according to a freedom of information request obtained by former pensions minister Sir Steve Webb.
While tax thresholds remain frozen, modest earners have been dragged into higher tax bands in a process known as fiscal drag.
This has caused the number of pensioners paying a higher rate of income tax to double in just four years, the data reveals.
Basic rate taxpayers must pay 20 per cent in tax on earnings over the £12,570 tax-free personal allowance.
While higher rate taxpayers lose 40 per cent of an income between £50,271 and £125,140. Additional rate taxpayers must pay 45 per cent on earnings more than £125,140.
State pension payments increase by the highest of inflation, earnings growth or 2.5 per cent under the triple lock mechanism – and the full, new state pension was hiked to £11,973 this April.
This means pensioners withdrawing just a small income from a personal pension on top of the full state pension are now paying basic rate income tax – leading to 8.8 million now paying income tax compared to 6.7million four years ago.
Thresholds are due to move in line with inflation from 2028 but vulnerable retirees relying on the state pension alone could be dragged into paying income tax as soon as next year.
Sir Steve, now a partner at consultancy LCP, says the effects of frozen thresholds are not just limited to income tax but are a 'triple whammy' for higher and additional rate taxpayers.
He adds: 'Not only does this mean more tax on income from state and company pensions, it also means pensioners are paying more tax on their savings as their personal savings allowance is cut.'
While basic rate taxpayers have a personal savings allowance of £1,000 – the amount of interest that can be earned on savings before paying tax – higher rate taxpayers get just £500. Those in the additional rate band have none at all.
This means a pensioner with an income of £50,271 – just £1 over the basic rate thresholds – will have their tax-free savings allowance slashed in half. For example, on £1,000 savings interest they will now have to pay £200 to the taxman.
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