The UK’s frozen income tax thresholds are impacting retirees, with over 249,000 paying upwards of £1,000 in income tax on their state pension alone. This concerning trend is expected to worsen as state pension payments continue to rise while the income tax personal allowance remains stagnant.
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Current government policy, maintaining the income tax personal allowance at £12,570 until 2027-28, is set to collide with rising state pensions due to the triple lock mechanism. This mechanism ensures annual pension increases based on the highest of inflation, average earnings, or 2.5%. This dynamic creates a “retirement tax” scenario, potentially impacting millions more retirees in the coming decade.
Frozen Thresholds and Rising Pensions: A Looming Crisis
The “full” new state pension, currently at £11,502 per year, is projected to surpass the personal allowance within the next three years. This means a growing number of pensioners will become income tax payers solely due to their state pension. The situation is exacerbated by the fact that many retirees also receive income from private pensions, further increasing their overall tax liability.
Analysis of Department for Work and Pensions (DWP) data reveals the extent of the current issue. Nearly 250,000 retirees pay over £1,000 in tax on their state pension, with over 10,700 paying in excess of £2,000. In extreme cases, individuals with the highest state pension payments are paying over £6,200 in income tax annually.
Political Promises and Potential Solutions
The Conservative party previously proposed a “triple lock plus” policy, intending to link the tax-free allowance to state pension increases. This proposal was deemed “not credible” by the Labour party at the time. The current debate centers on whether to maintain the frozen income tax threshold or implement alternative solutions to mitigate the growing tax burden on retirees.
Expert analysis highlights the significant impact of frozen thresholds coupled with rising state pensions. Sir Steve Webb, a former pensions minister, warns of the growing number of pensioners being drawn into the tax net and facing increasing tax bills each year. This issue affects a significant portion of the nearly 13 million retirees in the UK, particularly the 4.2 million receiving the new state pension.
The increasing tax burden on state pensioners underscores the complex interplay between government policy, pension systems, and individual financial well-being in the UK. Finding sustainable solutions to address this issue is crucial for ensuring financial security for current and future retirees.
