Stealth tax snares army of pensioners into clutches of HMRC

The number of pensioners who have been forced into the income tax net is set to hit a record 8.5 million next year due to a controversial stealth raid by Chancellor Jeremy Hunt.

The combination of Hunt’s freeze on tax thresholds and soaring inflation will see an additional 800,000 older Britons made to pay tax on their modest retirement incomes after working all their lives.

It means around two-thirds of over-65s on a state pension with only a small amount of extra income from a workplace pension or other nest egg will be caught in the tax trap.

Cash grab: The number of pensioners who have been forced into the income tax net is set to hit a record 8.5 million next year

The figures, compiled by former pensions minister Steve Webb, are likely to fuel calls to stop hitting retired people on relatively small incomes with tax demands, or at least to reduce the amount of tax they must pay.

‘Most UK pensioners have worked for decades and most have paid their taxes to the government of the day,’ said campaigner Ray Crawford, who has started an online petition in a bid to force MPs to debate the issue. ‘Why in our latter years do we have to pay these taxes?’

The stealth tax grab has its origins in a little-noticed move by Rishi Sunak when he was Chancellor. In 2021, Sunak introduced a four-year freeze on tax thresholds, pegging the personal allowance – the point at which workers start paying income tax – at £12,570 from 2022 until 2026. Hunt extended the freeze for another two years.

Runaway inflation means the tax grab will take billions of pounds more out of taxpayers’ pockets than originally thought. Pensioners who are receiving increases to keep pace with rising prices will be hit.

Initially the four-year freeze was estimated to raise £8 billion, but due to rising inflation it will bring in far more.

The State Pension, which is linked to the rate of inflation, rose by 10.1 per cent in April, forcing an extra half a million people to pay income tax, according to Webb’s analysis.

Those receiving the full amount now get £203.83 a week, making an annual income of £10,600. This is just £1,970 below the level at which they must start paying tax – so even a modest occupational pension or income from savings will push them into the taxman’s clutches.

The next increase in the pension will be based on the level of the Consumer Price Index (CPI) in September.

With inflation remaining stubbornly high, Webb reckons at least another 300,000 pensioners will start paying income tax next year. This assumes a 7 per cent rise in the State Pension – equivalent to an increase of £742 a year.

Webb, now a partner at pensions consultancy LCP, said: ‘The continued freezing of tax thresholds at a time of persistently high inflation will drag more and more pensioners into the tax net.

‘We have already seen a surge in the number of taxpaying pensioners over the last decade or so and this is set to continue.

‘This stealth taxation means that the majority of people of working age will now face the prospect of paying income tax in retirement.’

A freedom of information request by Webb revealed that nine out of ten pensioners who pay tax do so at the basic rate of 20 per cent.

Of the 12.2 million people who received the state pension last year, 7.7 million paid income tax. Of these, 671,000 paid the higher 40p tax rate, while another 65,000 paid the top rate of 45p in the pound.

The Government is set to rake in an extra £120 billion over the next five years because of ‘fiscal drag’, where workers are quietly pulled into higher tax bands when they receive pay rises. Even an inflation-linked pay rise for pensioners does not result in higher spending power.

The Office for Budget Responsibility watchdog reckons 3.2 million people will start paying tax for the first time, with a further 2.1 million entering into the higher 40p rate and 350,000 more paying the top rate of 45p.

By 2028 the tax burden will be at a post-war high of 37.7 per cent of annual economic output.

The number of pensioners paying tax has increased dramatically from 4.5 million in 2010 while the ‘triple lock’ has remained in place. This guarantees that the State Pension will rise each April in line with the highest of either the previous September’s inflation rate, earnings growth or a rate of 2.5 per cent.

The triple lock was suspended during the pandemic to avoid the Government having to hike pension payments by 8 per cent after wage inflation had been artificially boosted by workers coming off the furlough scheme and returning to payrolls.

The Treasury was asked for comment.

This post first appeared on Dailymail.co.uk