Annual income tax statistics from HM Revenue & Customs have estimated that in this tax year there are 8.1million income tax payers above the state pension age, a 25% increase on the 6.47million pensioners who paid income tax in 2020/21.
Annual income tax statistics from HM Revenue & Customs have estimated that in this tax year there are 8.1million income tax payers above the state pension age (or 22.5% of the total), a 25% increase on the 6.47million pensioners who paid income tax in 2020/21 (or 20.4% of the total).
Gary Smith, Partner in Financial Planning at wealth management firm Evelyn Partners, says: “There is a policy showdown on the horizon between the triple lock and the personal income tax allowance freeze. Both Conservatives and Labour have pledged a commitment to the triple lock in their manifestos for the upcoming election. And the policy of the current Government is to keep the personal allowance frozen until at least 2027/28 at £12,570, with no indication of an alternative policy from Labour.
“If the Bank of England’s latest forecast for September inflation of 7% is correct, then the triple lock – assuming wage growth does not exceed 7% - will boost the state pension to £11,432 in the 2024/25 tax year. Then in the subsequent three years it will require triple lock increases of ‘just’ 3.5% to send the annual state pension income above the personal tax allowance.[1]
“That then presents a conundrum to the government of the time: create an administrative and political headache by taxing the state pension, possibly at source – which would be massively unpopular among the more than 13million people then expected to be of state pension age - or make the headache go away by raising the personal tax allowance for everyone.
“As for the current income tax equation facing pensioners, in this tax year the state pension takes up all but £1,970 of the personal tax allowance, and if it rises by 7% for 2024/25 then just £1,228 of a pensioner’s tax exemption will be left after the state pension is taken into account. So anyone with even a modest private income is being tipped into paying basic rate tax at 20%.
“While pension saving can still be very tax-advantageous – particularly if a saver is a higher or additional rate taxpayer in their working life but then a basic rate payer when they draw on their pension – this does serve to remind today’s savers of the value of ISAs, which can provide a valuable supplementary income to pensions during retirement which is not taxed at access. Although contributions to ISAs for most people will be from taxed income.”
NOTES
[1] 3.5% increase for 2025/26 = £11,739
3.5% increase for 2026/27 = £12,150
3.55 increase for 2027/28 = £12,575
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