The number of pensioners paying tax on their income has risen, figures published today show, with even more set to be taxed in the coming years.
There were 6.74 million taxpayers of state pension age for the 2021/22 tax year, a rise of 4.3 per cent compared to the year before.
At the time, the full new state pension was £179.60, or £9,339.20 per year, using 74 per cent of the £12,570 personal allowance.
However, the state pension has since risen substantially – increasing by 10.1 per cent last year – and the personal allowance won’t increase until 2028.
The number of pensioners paying tax on their income has risen
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The ongoing freeze to tax thresholds and an 8.5 per cent hike means the full new state pension is forecast to exceed the personal allowance in just two years’ time.
This calculation assumes the inflation or wage growth figure used for the triple lock, which determines how much the state pension rises each year, is over four per cent for the next two tax years.
From April, the full new state pension will rise to £221.20 per week or £11,502.40 per year in the 2024/25 tax year, leaving just over £1,000 of the personal allowance.
Jon Greer, head of retirement policy at Quilter, warned: “There will no doubt be a considerable number of pensioners who have additional retirement income dragged into paying tax.
“What’s more, the reality is that we are soon set to be in the perverse situation where pensioners might have to start paying back their state pension to HMRC because of frozen allowances.”
He added: “Given that state pensions will shortly eradicate someone’s personal allowance, any private pension provision other than the tax-free cash lump sum will therefore become taxable at their highest marginal rate.
“For many that could mean big tax bills depending on how much they draw down.
“Pensioners are often worst hit by frozen tax allowances because they typically will be getting their income from a number of different investments and therefore lean heavily on CGT and dividend allowances to help create a retirement income in addition to their pension.
“However, the government has made it very difficult to avert being taxed very heavily on these types of investments.”
Mr Greer said it was “incredibly important” that people consider a spectrum of financial products to provide tax efficiency and use them “in the right way and at the right time” to try to prevent their income from being eroded by the tax.
He added: “Seeking professional financial advice can help someone make the most of their finances as current fiscal policy now mandates a different approach to financial planning.”
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