Stealth tax to ensnare millions of pensioners

  • Prospects from wider stealth attack to raise up to £75bn per year between 2027 and 2028
  • This equates to an additional 9 cents per pound in income tax
  • The full state pension will rise above the income tax threshold for the first time

Millions of people who rely on a full state pension to fund their retirement are at risk of falling into the tax net in the coming years, The Mail on Sunday can reveal.

The alarming prospect is due to a wider stealth attack that is estimated to raise £75bn a year between 2027 and 2028 – the equivalent of an extra 9p per pound in income tax.

As a result, the full state pension will exceed the income tax threshold for the first time since it was introduced over a century ago.

It comes after Chancellor Jeremy Hunt imposed a punishing six-year freeze on tax exemptions and thresholds.

No laughing matter: Chancellor Jeremy Hunt has imposed a punishing six-year freeze on tax exemptions and thresholds

No laughing matter: Chancellor Jeremy Hunt has imposed a punishing six-year freeze on tax exemptions and thresholds

Former Pensions Secretary Steve Webb, now at consultancy LCP, said: ‘It used to be that very few people living on a state pension in retirement had to think about taxes, but now millions are being dragged into the tax net because of the tax rate freeze. personal allowances.’

He said some of those affected are “certainly not well off and some are even receiving means-tested benefits.”

The silent freeze also means that millions of people on lower incomes will soon have to pay income tax, as their personal allowance – the level at which employees start paying tax – is stuck at £12,570.

The state pension is paid to 12 million men and women aged 66 and over and is currently up to £10,600 per year.

It is protected by the triple lock system, which means it will rise with inflation, annual earnings growth or 2.5 percent – ​​whichever is higher.

The state pension, which is awarded to those who have paid national insurance contributions for 35 years, is expected to rise by 8.5 per cent to £11,501 next year, in line with the latest increase in earnings.

Even if wage increases are capped at 5 percent in each of the next two years, the full state pension will exceed the personal allowance in 2026/2027, pushing people with no other income into the tax net for the first time.

This means the number of people of state pension age paying income tax will rise from 8.1 million in 2023/24 to 10.5 million in 2026/27, according to asset manager Evelyn Partners. That compares to just 6.5 million taxpaying pensioners in 2020/2021.

The vast majority of pensioners who pay tax do so at the basic rate of 20p per pound. In many cases, the amount owed will initially be modest, but retirees also face the burden of having to deal with the tax authorities.

Webb added: ‘It is time that tax thresholds were reviewed so that people on modest incomes are no longer caught up in the tax system.


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‘Retirement should be a time to enjoy yourself, without the hassle of the tax authorities.’

Forecasts prepared for the Growth Commission by the Center for Economic and Business Research show that the state pension will be taxable in 2027/2028 – the last year of the freeze.

Doug McWilliams, co-chair of the Growth Commission, said: ‘Our assumption is that average earnings will boost pensions as they are forecast to rise faster than inflation or 2.5 per cent.’ The commission was set up by former Prime Minister Liz Truss, but works independently of her.

Hunt’s massive stealth tax grab is negatively impacting the economy as households have less money to spend.

The Bank of England will weigh the growing impact of stealth taxes on the wider economy when it decides on Thursday whether to change the base interest rate, which currently stands at 5.25 percent.

Experts say the outcome is uncertain after the Bank recently halted fourteen consecutive rate hikes.

The scale of the stealth tax raid has ballooned due to inflation combined with Hunt’s decision to extend the freeze by two years until 2027/2028.

The Mail on Sunday first highlighted the tax attack in February 2022, when CEBR predicted it could raise £40 billion.

Hunt comes under pressure to tamper with the triple pension slot to save money. Maintaining the triple lock could add as much as £45 billion a year to the social security bill by 2050, the Institute of Fiscal Studies recently said.

It warned this would put “insurmountable pressure” on the government to raise the minimum retirement age.