Increases to the state pension and a long-running threshold freeze will drag hundreds of thousands more people born before 1959 who are on the state pension into paying the levy.
Thousands of state pensioners born before 1959 issued ‘bad news’ by HMRC
An additional 420,000 pensioners are set to pay income tax this year, it has been warned. Increases to the state pension and a long-running threshold freeze will drag hundreds of thousands more people born before 1959 who are on the state pension into paying the levy.
About 420,000 more people over state pension age, which is 66 so people born before 1959, will pay income tax in 2025-26, bringing the total to 8.7 million, according to data from HMRC and the Labour Party government.
Millions of pensioners and workers have been dragged into a higher tax bracket as their income rises because of the freeze, a process known as fiscal drag. David Brooks, the head of policy at the consultancy firm Broadstone, has spoken out over the blow.
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He said: “While the country’s demographic shift naturally increases the number of pensioners liable for income tax, fiscal drag is unequivocally pulling hundreds of thousands more into the income tax bracket each year.”
Neela Chauhan, a partner at the accountancy firm UHY Hacker Young, said: “Though it might seem equitable for higher earners to be paying more tax, there are real concerns over the impacts of placing an ever higher tax burden on high earners.
“Increasing the tax burden too high could push these individuals to leave the country or deter talented individuals from moving to this country. There are already concerns of a ‘brain drain’ in the UK.”
Reports in the national media have branded the update “bad news” for older UK households as the Cost of Living crisis continues.
Hargreaves Lansdown head of retirement analysis Helen Morrissey adds: “The pension tax paying population is surging.
“On the one hand, this can be celebrated as a sign of rising incomes among this population, but it’s also fair to say that frozen tax thresholds have also played a huge part in dragging more pensioners into tax-paying territory.
“With the freeze set to stay in place until 2028, we expect to see these numbers continue to swell.”
She adds that way people take their pension benefits can help mitigate these tax liabilities, pointing out that income taken from Isas remains free of income tax.
HMRC figures show that 8.7m people of State Pension Age or older are projected to pay income tax in the current tax year.
This is an additional 420,000 people when compared to the previous tax year, and an extra 1.85m people when compared to 10 years ago.