Millions of retirees already paying tax on their pension

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Millions of retirees are already paying income tax on their pension, new figures show, as the election clash surrounding pensioners and tax intensifies.

The number of people over pension age who are paying income tax rose from 7.85 million last year to 8.51 million this year – an increase of 660,000 – according to new data from HMRC.

This means that since 2020/21, when the pension age rose to 66, the number of pensioners paying tax is up by more than two million, from 6.47 million. This includes both state and private pensions.

The figures emerged as the Conservatives make an election promise that no retirees will pay tax on their state pension, under a policy the party is calling “triple lock plus“.

Under the plans, the party would increase the tax-free allowance for pensioners in line with the existing triple lock.

This would mean both the state pension and retirees’ tax-free allowance – currently £12,570 – would increase in line with inflation, average earnings, or 2.5 per cent, whichever is highest.

However, analysis from pension consultancy LCP found that nearly 2.5 million will still pay tax on their state pension even if the policy is put in place.

It said that the Conservative modelling focused purely on the standard rate of the new state pension, despite the fact that the majority of pensioners are on the old basic state pension system.

The basic state pension is £169.50 a week while the standard rate of the new state pension is £221.20. This is £51.70 a week more, an advantage of around 30 per cent.

However, most people on the old state pension combine this income with a significant earnings-related pension under the State Earnings-Related Pension Scheme (Serps).

This means they often earn over £12,570 and have to pay tax.

LCP added that although the full rate for the new state pension equates to around £11,500 per year, many pensioners actually also receive more than this, from private pensions, meaning these people would continue to be taxpayers.

The new figures from HMRC show there are now 8.95m taxpayers over the age of 65, compared with 4.9m in 2010/11 on the same definition, an increase of about four million.

Steve Webb, partner at LCP, said: “These new figures from HMRC are very timely and help to inform the debate about pensioners and tax. They show that a combination of frozen tax thresholds and significant increases in the state pension means the number of pensioners paying tax has continued to soar.

“But this is a continuation of a long-term trend which has seen the number of over 65s paying tax rise by around four million since 2010/11. For a pensioner in Britain, being an income taxpayer is now the norm rather than the exception”.

More pensioners are finding themselves pulled into higher tax brackets as a result of fiscal drag, where allowances are frozen while incomes are on the rise.

Pensions are a key general election battleground. Both Labour and the Tories have committed to maintaining the triple lock – the Tories for an entire parliamentary term.

But the triple lock plus policy has enabled them to claim that under Labour pensioners would end up paying £1,000 “retirement tax” over the course of the Parliament.

Labour have described the triple lock plus as an unfunded “desperate gimmick”.

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