Stealth tax raid will force 1.6M pensioners to pay income tax over next four years

More than 1.6 million pensioners will be forced into paying income tax over the next four years, as a result of a Government stealth tax raid.

An official analysis of the Prime Minister and Chancellor Jeremy Hunt’s tax plans has revealed that up to 600,000 people will be dragged over their personal allowance threshold – the point at which you must start paying tax – when the state pension rises next Monday.

Around 1.2 million extra pensioners will have to pay income in the new tax year as a result of the Government’s freeze on tax allowances, according to research from the House of Commons Library, commissioned by the Liberal Democrats. As many as 9.3 million people over age 66 will be paying the tax by 2028, it found.

British Finance Minister Jeremy Hunt (pictured) leaves Downing Street on March 19

The personal allowance typically rises by inflation but has been frozen since 2021 at £12,570 and will remain at that level until 2028.

The new state pension will rise by £902.20 a year from April 8, under the Government’s state pension ‘triple lock’ pledge. This guarantees the state pension will rise by the highest of inflation, wage growth or 2.5 per cent.

The full new state pension – paid to those who reached pension age after 2016 – will be £11,502.40 a year. 

But this pushes hundreds of thousands of pensioners closer to the upper limit of their personal allowance.

This ‘stealth’ tax trap means they can receive additional income of only £1,067.60 a year before having to pay income tax.

The personal allowance would have increased to £15,220 from next week if it had not been capped and had instead risen in line with inflation, and to £15,990 by 2028, according to the Office for Budget Responsibility. 

The number of pensioners paying income tax has nearly doubled since the Tories came to power, rising from 4.9million in 2010 to 8.5million today, according to research from think tank the Institute for Fiscal Studies. 

The stealth freeze on income tax thresholds will leave the average taxpaying pensioner £1,000 worse off by 2027/28, costing a collective £8 billion, analysis from think tank Resolution Foundation has found. 

More pensioners are at risk of facing fines for not paying tax they knew was due, experts have warned.

Sarah Olney, MP and Liberal Democrat Treasury spokeswoman, said: ‘Older people who have worked hard and contributed all their lives are now being clobbered with years of unfair tax hikes.’

How to sort your Isa and pension before the end of the tax year 

With another tax raid on the way for investors on capital gains and dividends, this is one of the most important tax year ends in years. 

On this special bonus episode of the This is Money podcast, Simon Lambert talks to Rob Morgan, of Charles Stanley Direct, to find out what investors need to do and why sorting your pension and Isa can save you a substantial amount in tax. 

Press play to listen to the episode on the player above, or listen (and please subscribe and review us if you like the podcast) at Apple Podcasts,  Audioboom, YouTube and Spotify or visit our This is Money Podcast page.     

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