Monday, February 19, 2024

UK
How the Tories turned pensioners into cash cows

Lauren Almeida
Fri, 16 February 2024 

Tories Pensions

No government has ever taxed pensioners more than the one currently sitting in Westminster. Over the past decade, thousands more pensioners have been dragged into paying tax each year, hit by high rates and shrinking tax-free allowances. Since the Conservatives have been in power, the average income tax bill for retirees has risen by £400.

It comes as Rishi Sunak and Jeremy Hunt are under pressure to deliver tax cuts in next month’s Budget.

The Tories have long promised to be on pensioners’ side, with one policy over them all: the triple lock on the state pension.


The triple lock, which guarantees that the state pension will rise by the highest of inflation, wage growth or 2.5pc, means that the full new state pension is on track to hit £11,502 in April. The increase in payments is expected to cost the Treasury an extra £2bn.

But each year the value of the triple lock is eroded by the Treasury’s deep freeze on tax thresholds. The personal allowance – the amount that anyone can earn without paying income tax – has been stuck at £12,570 since 2021 and, under current plans, will remain so until 2028.

Meanwhile, the average state pension payment is on track to hit £10,406 this spring – and will represent 83pc of the personal allowance, according to analysis by the consultancy LCP. It means any retiree who is paid anything over £180 from their private pension each month will trigger a tax bill.

The Government is facing renewed calls to increase the allowance. Steve Webb, a former pensions minister and now partner at the consultancy LCP, said: “The tax free personal allowance, particularly at an enhanced rate for pensioners, used to keep millions of pensioners out of the tax net. But the headroom between the typical state pension and the tax-free allowance has dropped dramatically.

“Without any explicit policy announcement, millions of pensioners on modest incomes are now finding themselves having to deal with HMRC at a time in their lives when they could do with being free of bureaucracy”.

Baroness Ros Altmann, another former pensions minister, also urged the Government to increase the personal allowance to stop millions more pensioners from being dragged into paying income tax.

She said: “Ideally, the Chancellor will raise the personal allowance so it remains above the full state pension,” she said. “If not, it seems odd that the Government will be giving with one hand and taking back with another.

“It will be a worry to many of the lowest income pensioners that they will have to pay some tax on their state pension.

“Of course, millions of pensioners do already have incomes above the £12,570 personal tax threshold, but that will normally be because they have other income on top of their state pension.

“However, if those who have nothing else end up facing tax bills, they may not realise they are liable for tax and suddenly find they receive demands from the Inland Revenue, possibly with interest charged for late payment.”

This stealth tax raid is expected to hit almost one million people next year alone, as the personal allowance freeze means people claiming a married couple’s tax break will pay a levy on their state pension for the first time.

The marriage allowance lets one half of a couple transfer a tenth of their personal allowance to the other, which can save them up to £252 a year if the other is a basic rate taxpayer. Around 40pc, or 900,000, of the 2.28 million people who claim the relief are pensioners, according to HMRC data.

Caroline Abrahams, of Age UK, said the charity was particularly worried about the impact of the frozen personal allowance for older people with relatively modest incomes.

She said: “Some will have to start paying income tax from April while others will face an increase in tax.

“Many in this situation have been hit hard by rises in energy and other essential costs but will feel, with justification, that they miss out on additional support they could badly do with, simply as a result of the pension savings they made during their working lives.

“Age UK firmly believes it’s time for the Government to return to indexing personal allowances from April 2024.”

Joanna Elson, of the charity Independent Age, added that should the state pension exceed the personal allowance, hundreds of thousands of vulnerable people would suffer. “A staggering one in five single pensioners have no other income outside of the state pension and benefits,” she said. “This group is already struggling to make ends meet and taxing their low income could risk pushing them further into poverty.”

The charity regularly receives calls from older people that have been forced to make dangerous cutbacks to survive.

“Callers have shared that they are washing in cold water to save energy, reducing the amount of food they eat, and going to bed early as it’s the only place they feel warm.

“There are currently 2.1 million older people living in financial hardship, and a further 1 million precariously living on the edge. These numbers are far too high. People in later life that are financially insecure should be supported, not forced to make a reduced income stretch even further.”

Yet the Government continues to treat this age group as an endless resource of tax revenue: the proportion of over 65s who have to pay income tax has risen from 50pc in 2010/11 to 68pc last year, according to analysis from the Institute for Fiscal Studies, a think tank – accelerated by the Tories’ so-called “granny tax” in 2012.

George Osborne, who was chancellor at the time, reversed a century-old tax break introduced by Winston Churchill: an age-related allowance used to let pensioners start paying tax at a higher income level than workers. Mr Osborne scrapped it in his second Budget, in a move that was condemned as an assault on retirees.

Persistent tax raids on pensioners’ wealth comes despite wide inequalities within the age group: although this generation is more likely to own property compared with their children and grandchildren, most have relatively modest incomes to fund their day to day lives.

A freedom of information request last year found that nine out of 10 pensioners who pay income tax do so at the basic rate of 20pc. Yet even those on modest incomes have been forced to hand over more in tax over the past decade – a pensioner earning £25,000 each year would pay £2,093 in 2010/11, according to analysis by the IFS. In the 2024/25 tax year, this will be £2,486.

Yet so far pensioners have been left out of tax cuts – at the Autumn Statement last year, a widely expected income tax cut was ditched in favour of a reduction in National Insurance rates. While this saved the average worker £450 in a year, it did nothing for those over the state pension age, who no longer have to pay towards NI.

All this is set against a system that easily, and often, overtaxes private pensions. Since pension freedoms were announced in 2015, pensioners have had to reclaim £1.2bn in overtaxation – clawing back £3,200 each on average from the tax office.

This is because under an emergency tax code, HMRC treats a saver’s first pension withdrawal as if it were going to happen each month. It therefore divides the saver’s personal allowance of £12,570 by 12, and then assesses the excess against 1/12th of each of the income tax bands.

It means a £50,000 single withdrawal would lead to a tax bill of almost £21,000, if this were a saver’s only earnings subject to income tax. If this were taxed on an ordinary basis, the bill would be just £7,486.

The true overtaxation figure is likely to be substantially higher, as those on lower incomes who are less familiar with the self-assessment process are not as likely to challenge the tax office on the bill.

A government spokesman said: “Pensioners whose sole income is the new state pension and who have not deferred or receive protected payments do not pay any income tax, and this year we provided the biggest ever cash increase to pension payments, a 10.1pc rise.

“Our tax burden remains lower than any major European economy – and by increases to personal thresholds since 2010 we will have taken three million people out of paying tax altogether.”

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