This morning we learned that a million more of the poorest pensioners will have to pay income tax thanks to the income tax threshold freeze. The Chancellor hugely underestimated how many would be hit by her decision in the last Budget to extend the £12,570 personal allowance freeze all the way to 2031. Finally, the real figure has slipped out.
New forecasts from the Office for Budget Responsibility, released alongside yesterday’s Spring Statement, show that by 2030/31 an additional one million state pensioners will be dragged into paying tax for the first time. This represents a massive increase in on previous numbers.
Older pensioners who believed they’d dropped out of the tax system may find themselves dragged back in. Handling today’s complicated digital tax processes could be horrendously daunting for those in their 80s or 90s.
But these new figures are only a small part of the overall story. They represent just one way pensioners will hit by Reeves’s extended tax grab. Here’s another.
The number of pensioners paying basic rate 20% income tax is already rocketing. In 2021, 6.7million retirees paid income tax in retirement, roughly half the 13million total. That’s on course to hit a staggering 10million by the 2030/31 tax year. By then, well over three quarters of pensioners will become taxpayers. And it gets worse.
Because at the same time, more and more are being pushed into higher tax bands, where HMRC will tax their income at 40% or even 45%.
In 2021, just under 500,000 pensioners paid higher rates of income tax at either 40% or 45%. That number has already more than doubled to around 1.2million, HMRC figures show. By 2031, hundreds of thousands more could be pulled into higher brackets as pensions rise and part-time earnings tip them over the thresholds.
Reeves isn’t just pulling a million extra older people into the tax system. She’s systematically pushing hundreds of thousands more into ever higher tax brackets. Yet in her Spring Statement, she didn’t mention older people once. And there’s a further complication.
Next year, the triple lock will push the new state pension above the £12,570 personal allowance. Anybody who gets the full amount will automatically be liable to pay tax on it. The Chancellor has tried to throw pensioners a sop. She’s previously announced that any retiree whose only income comes from the basic or new state pension won’t pay income tax during this Parliament.
As yet the details remain vague. They may remain so for some time, because as I’ve warned before, I don’t think Reeves has thought this through. Her patch up will create all sorts of unexpected. complexity.
A pensioner whose only income is the single-tier new state pension, paid to those retiring from April 6, 2016, may avoid tax under her plan. But it could be a different story for older pensioners.
They get the basic state pension, which will be exempt from tax under Reeves’s plan. However, many also get additional state pension on top, such as the state second pension (S2P) or SERPS. And that could still be taxable under Reeves’s plan, if it pushes their total income above the personal allowance.
In time, some could face a tax bill even if their total state pension income is below the new state pension.
It’s shaping up to be complete chaos, with Rachel Reeves at the centre. And I can’t say I’m surprised. Because that’s what she does.
