A Conservative Party MP has slammed the ongoing tax threshold freeze which is “punishing” pensioners who “saved hard” throughout their working lives.
Speaking exclusively to GB News, Greg Smith, MP for Buckingham hit out at the “unfair” way in which retirees are finding their income is being eroded by inflation, despite the triple lock commitment.
The Government has frozen the personal allowance at £12,570 until 2028, meaning many pensioners with a modest private pension income combined with the state pension are now having to pay income tax. This effect is known as fiscal drag.
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Several pensioners have contacted GB News after they were dragged into the 20 per cent basic rate income tax band, despite having a relatively modest income.
Have you been affected by the tax threshold freeze? If you would like to share your story, get in touch by emailing money@gbnews.uk.
Greg Smith said the Government should honour the state pension triple lock
GREG SMITH MP
A reader, on a “small” state pension and private pension income, explained they found themselves exceeding the personal allowance for the first time in 15 years last year.
Hearing about their situation, Mr Smith said: “I think it's absurd that pensioners who've done the right thing, who put into a private pension, who saved hard throughout their working lives, suddenly find themselves being punished for it as they draw down their pension.
“This is the real-life effect of inflation coupled with fiscal drag.
“If you don't keep up with inflation with the thresholds as a very minimum, people who were not expecting to pay tax, and arguably shouldn't be paying tax, are dragged into it.
“I have total sympathy with that pensioner that wrote into GB News.
“I have total sympathy with all pensioners out there who frankly have done the right thing all of their lives and now find themselves actually being double-taxed. Because they paid tax on it all the way through their working lives and now, they're being taxed on it again.”
The state pension increased by a record 10.1 per cent in April this year, and it’s on track to rise again by 8.5 per cent next year under the triple lock.
However, the freeze to the personal allowance means hundreds of thousands of people are being warned they are set to be taxed on the state pension in the coming years, as the triple lock uprates the payment but the Personal Allowance remains frozen.
On the triple lock increase being eroded by fiscal drag, Mr Smith said: “I think we’ve got two factors at play there for pensioners and the personal allowance.
“You’ve got this perversity of double taxation. They paid tax on their salaries throughout their careers when they were saving hard, when they were putting into their pensions, be that through National Insurance or private pension funds.
“So it's an absurdity to then tax them againas they draw down that pension. But you also have this inflationary impact.”
Mr Smith said he thought increasing the state pension via the triple lock was “the right thing to do”, but warned fiscal drag has been an “unintended consequence” of the policy and inflation.
“We should honour the triple lock,” he continued. “We should keep the triple lock for our pensioners going forward, but inflation will drag them into those tax bands and it's just an unfair position and an unintended consequence of inflation.”
Asked where he thought the basic rate tax band should kick in to avoid fiscal drag hitting pensioners, Mr Smith suggested having “a debate about exactly where the person allowances should be shifted to”.
He continued: “On one end of the scale, we've got that point at which you pay tax at all, and actually the Government has a good record on that because when we came into office in 2010, you paid income tax on everything over £6,500.
“You don't pay income tax until you earn 12,570 now.
“Now, inflation has bitten, so that probably does need to go up a bit too.”
The Conservative Party MP is urging Prime Minister Rishi Sunak and Chancellor Jeremy Hunt to end the higher rate tax threshold freeze in the Autumn Statement next week.
He told GB News: “Where we've got this real perversity is people that were never intended to be in the high rate of tax are being dragged into 40 per cent income tax, the 40 pence in the pound higher rate.”
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Mr Smith raised the matter in the House of Commons during Prime Minister’s Questions on Wednesday.
Mr Sunak said he agreed with his point, adding: “I am pleased that the vast majority of people will continue not to pay the higher rate. I share his ambition to cut taxes for working people.
“Right now, inflation is falling and we are sticking to our plan which is delivering a halving of it this year, because that is the most effective tax cut that we could have delivered for the British people this year, rather than making it worse as the party opposite would, borrowing money in a way that would be irresponsible and just drive up inflation and interest rates.
“But I want to reassure him that I absolutely share his ambition to cut taxes for working people, and as we stabilise the economy, that’s something that both the Chancellor and I are keen to deliver.”
A Treasury spokesperson previously said: “Our older population have the right to security and dignity in retirement which is why this year we provided the biggest ever cash increase to the state pension, a 10.1 per cent rise, which comes on top of extra direct cash payments worth up to £1,350 each to support with cost of living challenges and protection from rises in energy bills.
“We have taken three million people out of paying tax altogether since 2010 through raising personal thresholds, and the Chancellor has said he wants to lower the tax burden further but sound money must come first.”