Frozen thresholds will see one in five pensioners dragged into paying higher or additional rate tax by 2028, according to Quilter.
Freedom of information data from HM Revenue and Customs, obtained by the company, shows that 3.1 million or one in five pensioners will be dragged into paying higher or additional rate tax by the 2027/28 tax year due to the government’s frozen income tax thresholds.
The analysis shows that 2.7 million people aged 60 and over will be brought into the higher rate of income tax in the tax years 2022-23 to 2027-28, while nearly half a million will be brought into the additional rate. More than a third – 1.3 million – are 70 or over.
ONS population estimates show there are 16.8 million people aged 60 and over living in the UK. This means the equivalent of almost an additional one in five are expected to be taxed at the higher or additional rate of tax due to the government’s frozen tax thresholds increasing tax by stealth.
Additionally, not everyone aged 60 and over will be paying income tax. Therefore, the proportion of those who do pay income tax and are pulled into the higher and additional rates is likely to be even greater.
The Chancellor has confirmed that tax increases are on the cards for October’s budget. Although given the Labour government has promised not to change income tax rates, making a decrease unlikely, more people will end up paying higher tax rates.
Jon Greer, head of retirement policy at Quilter, added: “Not only will this boost government coffers by stealth, but it looks likely that other tax increases are on the cards. With the Labour government’s first Budget now just over two months away, it is vital that people are managing their finances tax efficiently to help reduce their overall burden.
“Those nearing retirement or semi-retired and still working should look to maximise their pension contributions whenever possible. Pension contributions can sometimes help you avoid tipping over into a higher income tax bracket. They are especially beneficial for higher rate taxpayers, as you can currently receive up to 40% tax relief on your contribution but will often only pay the basic rate of 20% when you withdraw the money in the future.
“Each tax year most people up to the age of 75 can earn tax relief on pension contributions they make up to 100% of their earnings with total tax relieved contributions limited by a £60,000 annual allowance. You can also carry forward any unused annual allowance from the previous three tax years. However, if you have already accessed your pension then you will be subject to the money purchase annual allowance (MPAA) limit of £10,000 per tax year. Pensions provide the most tax efficient way of saving for retirement, so it is important that people are aware of their annual allowance amount and that all who can afford to utilise it do so.
“For those who are already withdrawing from their pension, it is important to only take as much money as you need each tax year as the less you withdraw, the less income tax you will pay. Similarly, it is important to remember how much pension income you will have, including state pension income as it is also taxable.”
