A stealthy tax raid is disproportionately affecting Britain’s oldest pensioners, forcing hundreds of thousands to return part of their State Pension.
New figures show that almost half of those aged 85 and above are now subject to income tax on their State Pensions, more than double the rate among younger retirees.
The tax grab is a result of a freeze on tax thresholds, introduced by Rishi Sunak in 2021 and continued by Rachel Reeves until 2028.
An investigation found that 46% of 85- to 89-year-olds and 45% of those over 90 now exceed the £12,570 personal tax allowance threshold, compared to just 22% of pensioners under 85.
This has sparked concerns that the Government is targeting the most vulnerable, including elderly individuals with declining health and dwindling savings, by allowing the so-called “retirement tax” to increase annually.
The continued freeze on income tax thresholds, initiated by Mr Sunak in 2022, means that any rise in income, including the State Pension, pushes more people into the tax bracket.
This freeze is set to continue until 2028, effectively turning what was once a tax-free retirement benefit into a taxable burden for millions.
The State Pension triple lock, promising an annual rise by whichever is highest out of inflation, wage growth, or 2.5%, has unwittingly set a tax trap for retirees, resulting in a surge of them being nudged over the threshold into paying taxes.
Department for Work and Pensions (DWP) figures reveal that out of the 677,000 individuals aged 90 or above, 307,000 now receive over £12,570 a year in State Pension – this equates to 45.4%. In stark contrast, only 12.1% of those aged between 65 and 69 are in the same bracket.
Moreover, for the oldest pensioners, the tax implications are even more severe. Among those aged 80 and over, 6.1% are paying at least £1,000 in income tax solely on their State Pension, whereas just 1.3% of those aged 65 to 79 fall into this category.
The complexity of the UK’s pension system often results in many over-80s receiving State Pension above the tax-free allowance due to accumulated entitlements from the pre-2016 “old” system, which comprised the basic State Pension and an earnings-related addition known as Serps.
While the “basic” pension stands at £9,175.40 per annum – considerably less than the new State Pension, now at £11,973 – numerous older pensioners continue to benefit from significant Serps top-ups, propelling them over the tax threshold.
Steve Webb, a former pensions minister, now with consultancy LCP, told the Telegraph: “It is often forgotten that the old State Pension was made up of two parts – a largely flat-rate basic pension and an earnings-related pension on top, which could add significantly to the amount you received.
“People whose pension comes mainly from the state rather than a workplace pension can easily find that their total State Pension takes them into the income tax bracket. Those on the new system are mostly under the tax threshold, but this will change dramatically at some point in the next two years when the standard new pension goes over the tax threshold. At this point, most new state pensioners will be taxpayers, regardless of any other income.”
The looming squeeze could see anyone receiving the full new State Pension being taxed by April 2027, unless the Government lifts the threshold. Caroline Abrahams, charity director at Age UK, said: “People in this age group are much more likely to be in ill-health and also to find their savings have dwindled over the years, compared to others who have only recently retired.
“The disproportionately adverse impact on the oldest people in our society is another reason why the Government should now increase the personal allowance, rather than keeping it frozen year on year.”
Baroness Ros Altmann, also a former pensions minister, warned that the tax burden could push many frail pensioners into financial difficulty and confusion.
“The oldest pensioners now in their 80s or 90s will be the ones likely to have most Serps, which can give a large extra payment on top of the old basic State Pension. While it is still the case that nearly half of the oldest citizens do not yet pay tax on their State Pension income, if their State Pension increases while the tax threshold stays frozen, then more may be dragged into the tax net.
“The most elderly may be unable to cope with tax returns, leaving them vulnerable to fines or penalties for failing to pay small amounts of tax.”
A spokesman for the Treasury insisted support was in place: “We are committed to helping our pensioners live their lives with dignity and respect, which is why we have frozen fuel duty and increased the State Pension to leave pensioner couples up to £88 better off a month. Our commitment to the triple lock means millions will see their pension rise by up to £1,900 this parliament.”
