Freeze sees 1m more pensioners hit by tax as £20/month alert issued | Personal Finance | Finance

The number of retirees paying income tax increased by more than one million in one year; at least 22 per cent of taxpayers were now over state pension age.

HM Revenue and Customs figures released today for the 2023-24 tax year reveal that the number of taxpayers over the age of 66 is 8.16 million, compared to 7.14 million the previous year. The sharp increase comes as state pension expansion and frozen income tax thresholds push more older people to pay a basic tax rate of 20 per cent on their retirement income.

The number of people of all ages paying tax at the 45 per cent surcharge rose from 569,000 in 2022-23 to 893,000 in 2023-24, an increase of 57 per cent. This was mainly due to the reduction in the additional interest threshold from £150,000 to £125,140 in April 2023.

The basic and higher rate income tax thresholds have remained constant since 2021 at £12,570 and £50,270. All three thresholds are planned to remain unchanged until 2031; This means that as wages rise, increasing numbers of people will be drawn into higher tax brackets.

Some 2.17 million more people will pay basic rate income tax in 2023-24 than the previous year, while the number of taxpayers at the 40 per cent higher rate increased by 12.8 per cent (654,000) to 5.76 million.

The value of a full new state pension is £12,548 per year, £22 below the basic rate tax threshold, also known as the tax-free personal allowance. This means that even retirees with modest additional income are now facing a tax bill. Next year, anyone receiving their full state pension may have to pay income tax on their payments because the triple lock guarantees that wages will rise in line with inflation or 2.5 per cent, whichever is higher.

In November, Chancellor Rachel Reeves promised that retirees whose sole income is a state pension would not face any tax liability. However, the exact mechanism for how this will be implemented remains unclear.

Dennis Reed, of pensions campaign group Silver Voices, said: “These figures are no surprise. The lower income tax band, which is frozen every year, means more and more older people are being dragged into the tax system. “By the end of this parliament, the vast majority of pensioners in this country will be paying tax – it’s shocking. Most retirees do not earn income from work, so what is taxed are the state pension and any additions to the state pension, such as a widow’s pension or a small private or occupational pension.

“Just an extra £20 to £30 a month could leave you taxed, and when people are already struggling with living costs the last thing they need is to be taxed.”

HMRC has confirmed the introduction of a revised methodology for the 2023-24 tax year; this methodology accounts for 196,000 of the additional million retirees currently subject to tax. The tax office also stated that changing demographics along with increasing retirement incomes were responsible for this increase.

Rachael Griffin, of wealth manager Quilter, said: “These figures show how frozen tax thresholds are completely reshaping the country’s tax profile. Given that we do not expect to see any change in thresholds until 2031, these dynamics are likely to intensify rather than ease. “This change is no longer limited to traditionally high-paid occupations. Experienced teachers, senior nurses and police officers are increasingly subject to higher rates of tax through incremental pay increases, overtime or promotions, rather than through genuinely higher earnings. “What was once a marginal issue is now becoming a mainstream experience for a large portion of the workforce.”