Finance expert says State Pension tax should be paid by those with a higher income

New data from HM Revenue and Customs (HMRC) reveals that the number of people of State Pension age or over paying income tax has surged in recent years due to frozen tax thresholds and significant successive increases to the State Pension. Statistics show that around 6.7 million people of State Pension age or over were paying income tax as of 2021/22.

However this is expected to have risen to 7.1m in 2022/23, 7.9m in 2023/24 and 8.5m in 2024/25 as more pensioners fall into the income tax bracket. The most recent figures from the Department for Work and Pensions (DWP) suggest there are nearly 12.7m people of State Pension age across the UK, which means 67 per cent of all retirees are predicted to pay tax for the current financial year.

However, financial expert David Brooks, says that it is “wholly appropriate that pensioners on higher incomes are subject to higher levels of tax”. He added that “it is confusing why pensioners paying tax is necessarily seen as a bad thing.”

The Head of Policy at independent consultancy Broadstone, explained: “We would expect a growing number of pensioners to be liable for income tax as the country’s demographic changes due to our ageing population and pace of increases to the State Pension. But it is a reminder that with the income tax thresholds frozen at £12,570 until 2028 from 2021, an ever-growing proportion of pensioners will be captured by the tax given the increases to the State Pension.”, reports the Daily Record.

“For most people the State Pension will be below the Personal Allowance, and it is only extra private savings that exceed this limit. It is wholly appropriate that pensioners on higher incomes are subject to higher levels of tax – it is confusing why pensioners paying tax is necessarily seen as a bad thing.”

Sir Steve Webb, a former Liberal Democrat pensions minister who now works with Lane Clark and Peacock (LCP) as a partner, commented: “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 tax payer is now the norm rather than the exception.”

Recent LCP research reveals that almost 2.5m retirees in Britain receive State Pensions that surpass the personal tax allowance, currently at £12,570 annually. Mostly these are pensioners on the Old or Basic State Pension system who have topped up a Basic pension with substantial earnings-related retirement benefits.

As of the 2024/25 financial year, the New State Pension stands at £11,502 annually, while the full, Old or Basic State Pension amounts to £8,814. The Conservative Party manifesto includes a pledge to a Triple Lock Plus, a scheme designed to ensure the Personal Allowance for income tax will increase annually in line with the Triple Lock.

Under this system, the New and Basic State Pensions rise each year by the highest of three factors: average annual earnings growth from May to July, Consumer Price Index (CPI) inflation in the year to September, or 2.5 per cent. Last week, the Resolution Foundation reported that due to changes in benefit policy since 2010, the average pensioner is £900 better off, while the average non-pensioner household is £1,400 worse off due to a less generous social security system for working-age families.

However, the think tank’s report also highlighted that while benefit policies have generally favoured pensioners. Recent tax changes such as cuts to employee National Insurance have helped to balance the “winners and losers”.

Considering all permanent tax and benefit changes since 2010, the research discovered that on average, pensioner households will be £1,000 a year better off in 2024/25, while working-age households will be £760 a year better off.