Stealth tax freeze threatens income of 1.6 million pensioners

Almost two million pensioners will be forced to pay income tax in the next four years due to the government’s stealth tax freeze, new research has revealed.

The chancellor’s refusal to increase the £12,570 threshold when people start paying income tax – and extending it until 2028 – will see a record number of pensioners being hit with tax bills.

Currently, 8.5 million pensioners pay income tax – up from roughly 4.9 million in 2010.

However, analysis by the House of Commons for the Liberal Democrats has found an extra 1.6 million pensioners will be paying it within the next four years compared to if the threshold had risen with prices.

Without the freeze, the allowance would have risen to £15,220 this year and up to £15,990 in 2027/28.

The Lib Dems say the policy will see the Conservative party face a “reckoning at the ballot from older voters sick of being taken for granted”.

Recent figures from the Department for Work and Pensions show there are currently 12.7 million people receiving the state pension. According to the Institute for Fiscal Studies, over 60 per cent of these pensioners now pay income tax, up from around 50 per cent in 2010.

Further analysis by the Resolution Foundation has found that the freezing on income tax thresholds will leave the average taxpaying pensioner £1,000 worse off by 2027-28.

The average taxpaying pensioner will be £1,000 worse off by 2028 (PA)
The average taxpaying pensioner will be £1,000 worse off by 2028 (PA)

Liberal Democrat treasury spokesperson Sarah Olney MP said the figures were a result of Jeremy Hunt’s “pensioner punishing budget”: “These stark figures reveal the stealth tax bombshell facing pensioners under this Conservative government.

“Older people who have worked hard and contributed all their lives are now being clobbered with years of unfair tax hikes.

“Jeremy Hunt’s pensioner-punishing Budget will not be forgotten come the next election.”

The revelations follow on from the spring Budget, which saw the government prioritise national insurance tax cuts for workers.

After cutting 2 further percentage points off national insurance, Mr Hunt and Rishi Sunak indicated their goal was to abolish the tax entirely, leaving campaigners concerned that the cost of scrapping the tax would fall on the shoulders of pensioners.

Both the Conservatives and Labour have now committed to keeping the state pension triple lock, meaning the state pension rises each year in line with the highest out of wage rises, inflation or 2.5 per cent. This means that the state pension is going up by 8.5 per cent this month.

Baroness Altmann, a former Tory pensions minister, told the Telegraph the income tax freeze was “worrying”.

“I do think it is worrying that so many more pensioners could be dragged into the tax net as the state pension may soon rise above the frozen threshold.

She added: “Most of those tipped into tax will be poorer pensioners with little more than their state pension to live on. Most of them will be totally unaware of any liability and will never have filled in a tax return in their life. They are then at risk of being hit with fines and penalties for not paying a tiny amount of tax that they didn’t even know about.”

A Treasury spokesperson defended the decision to freeze tax thresholds as a “difficult decision” that the government had to take, saying: “After providing hundreds of billions of pounds to protect lives and livelihoods throughout the pandemic and Putin’s energy shock, we had to take some difficult decisions to help pay it back.

“Now the economy is turning a corner, we have cut National Insurance by a third, meaning that, coupled with above-inflation increases to personal tax thresholds since 2010, we have saved the average earner over £1,500 compared to what they otherwise would have paid.”