Millions of state pensioners are set to be dragged into paying income tax over the next three years due to frozen tax thresholds.
Around 8.2 million people over the age of 60 will be paying income tax by 2027/28, according to analysis by HM Revenue & Customs.
The issue stems from the personal allowance threshold remaining frozen at £12,570 since 2021, whilst state pensions continue to rise under the triple lock.
Over 60s are warned they will “soon find themselves having to pay back a proportion of their state pension,” due to the threshold freeze.
Critics have labelled this a “stealth tax” on pensioners who are finding themselves pushed over the tax threshold despite having paid into the system throughout their working lives.
Rachael Griffin, tax and financial planning expert at Quilter, explained: “The number of people expected to pay income tax for the first time, or at a higher rate, by 2027/28 is set to rise exponentially due to the continued freeze on tax thresholds.
“As incomes rise, including state pension income, more people are being dragged into paying tax for the first time or into higher tax brackets, a phenomenon known as fiscal drag.
More people are being dragged into paying tax for the first time or into higher tax brackets
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“Even without an explicit tax rise, the government will continue to collect more from taxpayers each year by keeping thresholds static.
“What’s more, as the state pension rises while the personal allowance remains stagnant, many pensioners will soon find themselves having to pay back a proportion of their state pension.”
The freeze was initially implemented by the previous Conservative government, with the current administration deciding not to extend the freeze on personal tax thresholds at their first Budget.
Data provided by HMRC shows that around 11.6 million will be affected over the next three years, with 8.2 million of those individuals over the age of 60.
This represents a dramatic increase from original government predictions, which estimated around 1.3 million people would be dragged into paying income tax.
The impact of high inflation since the thresholds were frozen has significantly worsened the situation.
The DWP has stressed that those whose income comes solely from the state pension don’t have to pay tax
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When questioned in the Commons about this issue, Pensions Minister Torsten Bell stated: “Currently the personal allowance, which is the amount an individual can earn before paying tax, is higher than the full rates of both the basic and new state pensions.
“This means pensioners whose income is solely the full new state pension or basic state pension will not pay any income tax.”
The DWP has stressed that those whose income comes solely from the state pension don’t have to pay tax.
However, many pensioners with private pensions or other income streams are finding themselves pushed over the threshold.
Bell added: “This Government is absolutely committed to supporting pensioners and giving them the dignity and security they deserve in retirement.
“Over 12 million pensioners will benefit from our commitment to protect the triple lock which is set to increase spending on the state pension by around £31billion and will increase people’s yearly state pensions by up to £1,900 this Parliament.”
Financial experts suggest several ways pensioners can mitigate their tax burden
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The situation creates a paradox where the government gives with one hand through pension increases while taking with the other through taxation.
Financial experts suggest several ways pensioners can mitigate their tax burden.
One option is to utilise ISAs, which allow deposits of up to £20,000 per year with tax-free interest and withdrawals.
Pension savings also offer tax advantages, with the ability to withdraw up to 25 per cent of your pot tax-free upon reaching retirement age.
Griffin noted: “Strategic financial planning has never been more important.”
Married couples should consider the Marriage Allowance, which lets individuals transfer £1,260 of their personal tax allowance to their spouse or civil partner.