Pension nightmare: 500,000 retirees to be forced to pay income tax next year under plans

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An extra 1.2million over-65s have already been dragged above the personal tax-free allowance since the last general election, with more than 7.7million now paying tax on pensions and earnings. It means millions of retirees with modest private pensions will lose chunks of next year’s 10 per cent triple-lock state pension pay rise to the taxman – leaving them with a pay cut in real terms.

Ex-pensions minister Sir Steve Webb has urged new Chancellor Kwarsi Kwarteng to raise the threshold to ease the burden for pensioners in Friday’s emergency budget.

In April 2022, the state pension rose by just 3.1 per cent, yet the fact that income tax thresholds were frozen meant that the number of over-65s paying tax rose by 390,000 between last year and this year.

With a much larger pension increase expected in April 2023, calculations by consultancy firm LCP suggest this is likely to be at least half a million more being added to the total.

This would mean at least 1.7 million extra over-65s being brought into tax since the General Election.

LCP says that 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.

Retirees, who once were handed an extra tax-free allowance, will now endure their largest tax burden on record next year due, the figures show.

It comes as the state pension is on track to rise by a record £1,000 next April, because the Government has promised to honour its “triple lock” promise, which ensures that the benefit rises by the highest of either inflation, wage growth or 2.5 per cent.

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-65s 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 up 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 1.3million working pensioners will also have to pay the new health and social care levy of 1.25 per cent from next April.

Sir Steve Webb, former pensions minister and now partner at LCP, warned: “Freezing tax thresholds is a stealthy way of raising tax at the best of times, but at a time of soaring inflation, freezing thresholds has a profound effect.

“During this Parliament we have already seen over a million extra pensioners dragged into the tax net, and next April’s increase is likely to add at least half a million more.

“If the Chancellor is looking for ways to cut taxes and ease cost of living pressures on those on modest incomes, he could do worse than review the long-term freeze of income tax allowances”.

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