One in Five Pensioners Facing Higher Taxes by 2028: HMRC Report
As the Government’s frozen tax thresholds continue to impact retirees, new data from HMRC reveals that one in five pensioners will be pushed into paying a higher tax rate by 2028. The report, obtained by Quilter through a freedom of information request, shows that approximately 3.1 million retirees will be affected by this tax increase.
The Frozen Thresholds Effect
With the frozen personal tax thresholds in place until 2028, more than a third of the affected pensioners, totaling 1.3 million individuals, will have to pay the higher rate of 40 per cent or the additional rate of 45 per cent. This significant increase in tax burden will have a substantial impact on the finances of these retirees, many of whom are already living on fixed incomes.
State pensioners on lower incomes are also at risk of being pulled into the tax net for the first time, with around 400,000 individuals likely to be affected based on current forecasts. As the state pension rises above the personal allowance threshold of £12,570, more pensioners will find themselves subject to income tax obligations.
HMRC’s Response
HMRC has acknowledged the challenges faced by pensioners in meeting their tax obligations and has assured that it will not aggressively pursue those who owe small amounts of tax when the state pension exceeds the personal allowance threshold. Taxpayers who receive income from employment or private pensions will have their taxes deducted through the PAYE system, but those relying solely on the state pension will receive a “Simple Assessment” letter outlining their tax liabilities.
Jon Greer, head of retirement policy at Quilter, emphasized the growing number of pensioners who will be impacted by the frozen tax thresholds and the subsequent increase in tax rates. He noted that this shift will not only boost government revenues but may also signal additional tax increases in the future, underscoring the importance of tax-efficient financial planning for retirees.
Labour’s Proposed Changes
Amidst these tax challenges, Labour has reportedly considered plans to overhaul the taxation of pension contributions, potentially replacing the current tiered system of tax relief with a flat rate of either 20 per cent or 30 per cent. While this proposed change could benefit basic-rate taxpayers, higher-rate payers may face higher tax charges on their pensions.
The Impact on State Pensioners
The state pension increases annually in line with the triple-lock policy, which guarantees that it will rise by the highest of wage growth, inflation, or 2.5 per cent. Recent figures indicate a significant growth in wage rates, which could result in the state pension exceeding the tax threshold in the coming years. As the state pension approaches the £12,570 mark, more pensioners will be required to pay income tax, further straining their financial resources.
Campaigners and experts have called for clarity from HMRC on the exact amounts that will be pursued from pensioners who owe taxes on their state pension. Dennis Reed of the Silver Voices campaign group highlighted the need for transparency in HMRC’s tax collection practices, particularly for vulnerable pensioners facing tax liabilities for the first time.
Planning for the Future
As pensioners grapple with the prospect of increased tax obligations, it is essential for them to plan their finances effectively to mitigate the impact of these changes. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, emphasized the importance of clarity and certainty in tax calculations for pensioners, enabling them to budget and manage their finances with confidence.
HMRC’s commitment to not pursuing pensioners for small amounts of tax owed on their state pension provides some reassurance to retirees facing tax challenges. By providing clear guidance on tax thresholds and obligations, HMRC can help pensioners navigate the complexities of the tax system and ensure they meet their tax obligations without undue burden.
Looking Ahead
As the tax landscape for pensioners continues to evolve, it is crucial for policymakers to consider the impact of tax changes on retirees and provide support where needed. By addressing the challenges faced by pensioners in meeting their tax obligations, the government can ensure that retirees can enjoy a secure and stable financial future in their retirement years.
In conclusion, the growing number of pensioners facing higher tax rates by 2028 highlights the need for proactive financial planning and support for retirees. By addressing the challenges posed by frozen tax thresholds and potential tax increases, policymakers can help pensioners navigate the complexities of the tax system and ensure their financial security in retirement.