Older households will lose £530 a year on average due to Chancellor Jeremy Hunt “picking pensioners’ pockets” with stealth taxes, according to new research carried out by the Liberal Democrats.
The annual basic state pension has increased by £692 a year thanks to the triple lock but a typical basic rate tax-paying pensioner will have to pay three-quarters of the triple lock increase to HMRC.
The average pensioner risks being hit by a £530 a year levy due to the ongoing impact of fiscal drag on retirement incomes, analysis suggests.
This is due to the Government’s freezing of income tax thresholds with the Liberal Democrats warning that 77 per cent of the triple lock rise is being decimated by fiscal drag.
Fiscal drag, otherwise known as a stealth tax, occurs when allowances are frozen during a period of time when wages or incomes are increasing, resulting in people being dragged into higher tax brackets.
Some 1.6 million pensioners will be dragged into paying income tax by 2027-28 as a result of the freezing of income tax thresholds.
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Pensioners risk paying income tax for the first time this year
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Wendy Chamberlain MP, the party’s work and pensions spokesperson, explained: “Jeremy Hunt has taken a bolt cutter to the triple lock.
“This Conservative government is picking pensioners’ pockets to try and fill the black hole caused by their disastrous economic policy.
“These are people who have played by the rules their whole lives, paid their taxes and contributed so much to our society. They expect that in their older years the government would look after them, not place even more financial hardship upon them during a cost of living crisis.”
From today, those in receipt of the basic and new state pension are being awarded an 8.5 per cent boost to their benefit payments which will see people who get the full new state pension getting more than £11,000 a year.
The Government has cited its commitment to the triple lock as one of the primary policies aimed at helping Britain’s pensioners amid the cost of living crisis. During last year’s Autumn Budget, Chancellor Jeremy Hunt confirmed that tax thresholds would be frozen until at least April 2028.
The full new state pension has been raised from the £10,600.20 a year to £11,501.22. With Mr Hunt’s tax threshold freeze, the tax-free allowance on incomes is sitting at £12,570.
While the full state pension is lower than the personal allowance, pensioners with retirement income could easily pulled across this threshold. Those who claim the marriage allowance may also find they’re affected.
Figures from HMRC revealed that the number of individuals aged 65 or older who pay income tax jumped 10 per cent to 8.5 million in 2023-24.
This represented a 25 per cent increase on the 6.8 million income taxpayers of state pension age paying tax in 2020-21, which is when tax thresholds were originally frozen.
Henrietta Grimston, director of financial planning at Evelyn Partners, issued a warning to older households who are in danger of paying income tax this year on their retirement income.
She explained: 'Not many pensioners will be complaining about a boost to their weekly state pension payments.
“But as this latest increase - like those of the last couple of years - comes against a background of frozen tax thresholds, it does mean increasing numbers will be pushed into paying income tax, or into a higher tax band.
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State pension and other retirement benefits have been awarded a 8.5 per cent rate hike from today
PA“Most of those receiving the new full rate state pension will only be able to draw £1,068 in income that is not covered by other allowances before they start paying income tax at the basic rate of 20 per cent in the new tax year.
“And those with more substantial sources of private income who are close to the higher rate threshold of £50,270 could be pushed into paying tax at 40 per cent on some of their income.”
A Treasury spokesperson told GB News: “Pensioners do not pay any income tax if their sole income is from the full new state pension.
“We are standing by our commitment to maintain the triple lock by raising the basic state pension from Monday to almost £170 a week, after the largest ever cash increase last year.
“As the Resolution Foundation has said, the introduction of the triple lock and New State Pension means pensioners are on average £1,000 better off than if the state pension had just risen with earnings.”