Pensioners are among the millions being ‘battered’ by income tax | Personal Finance | Finance

The number of pensioners shouldering an income tax burden has risen by more than four million, official figures show.

Some 8.5 million people aged 65 and older are now income taxpayers – an increase of around 10 percent in the past year, according to HM Revenue & Customs data. The number has doubled since 2004-05 when just under 4.3 million pensioners paid income tax.

And this tax year there will be 35.9 million people of all ages paying income tax – an extra 4.2 million on the 31.7 million paying in 2020-21. This means a £30billion boost to Treasury coffers by 2028 – costing each UK household the equivalent of £4,200.

John O’Connell, chief executive of the TaxPayers’ Alliance, said: “Britons are being battered by stealth taxes.

“Frozen income tax thresholds are contributing to falling living standards during a cost-of-living crisis. The Government should give taxpayers a break and raise thresholds in line with inflation.”

Income tax thresholds are frozen until 2027-28 under a policy introduced by Prime Minister Rishi Sunak when he was Chancellor in 2021, and then extended by the current Chancellor Jeremy Hunt.

Someone earning £20,000 in 2022-23 will pay £870 extra by 2028, equivalent to a 10p rise in income tax, said Interactive Investor. Someone on £50,000 will pay £1,924 extra by 2028, equivalent to a 5p rise.

Economists say this “fiscal drag” of workers over the higher rate tax thresholds will see 5.6 million higher rate taxpayers in 2023-24 – a 40.7 percent increase compared with 2020-21.

Higher rate taxpayers now make up a projected 15.6 percent of the overall tax-paying population in the current tax year. There has also been an eight percent increase to 29.4 million basic rate income taxpayers between 2020-21 and this year.

Workers can earn a standard Personal Allowance of £12,570 before paying taxes. A basic rate of 20 percent is due on anything between £12,571 to £50,270. Higher rate taxpayers pay 40 percent on earnings between £50,271 and £125,140.

This means an increasing number of middle-income earners such as headteachers (with an average salary of £60,860), senior nurses (Band 8 on £58,972) and opticians on £54,302 are paying a higher rate of tax. An additional tax demand of 45 percent is due on anything above £125,140.

Sir Steve Webb, a former pensions minister who is now a partner at consultants LCP, suggested the significant increase in the number of older people paying tax had been driven by the bumper 10.1 percent increase in the state pension this April, alongside inflation-linked rises to other pensions.

He said: “A combination of high inflation and frozen tax allowances means that well over eight million people aged 65 or over are now paying tax, a doubling in the last two decades.

“The number of pensioners paying tax will continue to increase rapidly in years to come, particularly if inflation remains relatively high and thresholds continue to be frozen.”

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “The stealth tax rate has dragged more than four million people into paying income tax, and it has also inflated the numbers paying higher and additional rate tax.

“Back in the 1990s, fewer than five percent of people paid higher rate tax, whereas now it’s more than 15 percent. It’s the last thing people need at a time of runaway inflation, and things are only going to get worse.

“We’re still only very near the start of the income tax threshold freeze – which kicked in from April 2022 and is set to last until 2028.

“It means things are set to get even worse over the next few years. We’re going to see a steady stream of taxpayers crossing thresholds and paying eye-watering levels of tax.”

Alice Guy, head of pensions and savings at Interactive Investor, added: “The stark figures demonstrate the chilling effectiveness of freezing tax thresholds.”