Newly released figures have unveiled a concerning trend in the taxation of pensioners’ incomes, with the number of retirees paying taxes on their earnings escalating. The data, made public today, indicates a notable surge in the proportion of pensioners subject to taxation, with projections indicating a further increase in the years ahead.
For the tax year 2021/22, the tally of taxpayers of state pension age reached 6.74 million, marking a 4.3 per cent ascent from the preceding year. During this period, the full new state pension stood at £179.60 weekly or £9,339.20 annually, utilising approximately 74 per cent of the £12,570 personal allowance.
Nevertheless, the landscape has evolved since then, witnessing a substantial upswing in the state pension, which escalated by 10.1 per cent in the past year alone. Conversely, the personal allowance is slated to remain stagnant until 2028.
The persistent freeze on tax thresholds coupled with an 8.5 per cent upsurge imply that the full new state pension is anticipated to surpass the personal allowance in a mere two years. This calculation predicates on the assumption that the inflation or wage growth index utilised for the triple lock, which dictates the annual increment of the state pension, exceeds four per cent for the ensuing two tax years.
Commencing April, the full new state pension is poised to elevate to £221.20 weekly or £11,502.40 yearly for the 2024/25 tax period, leaving a margin of just over £1,000 from the personal allowance.
The head of retirement policy at Quilter expressed apprehension over the looming predicament, cautioning that a substantial cohort of pensioners might witness additional retirement income being subjected to taxation. The implications could see pensioners compelled to remit portions of their state pension to HMRC due to the frozen allowances.
He articulated, “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 substantial tax liabilities depending on their withdrawal amounts.”
The evolving fiscal landscape poses substantial challenges for retirees, necessitating proactive measures to navigate potential tax liabilities effectively. As the demographic profile of pensioners continues to evolve, policymakers and financial experts face mounting pressure to devise sustainable solutions that safeguard retirees’ financial security while ensuring equitable taxation practices.
