This means that as earnings rise to keep up with climbing prices, more and more of what people earn is taken from their pay packets and given to the taxman.
At the same time, the full state pension sits at £11,973 per year. This means in the next couple of years, as it rises, it is forecast that it will jump above the personal allowance and pensioners will pay tax if they get the complete payment.
The state pension is seen by many as an earned payment at the end of decades of working even though in legislative terms, it’s actually a benefit, and you do not need to pay in per se to receive it.
The idea of having to pay some of it back as tax may not only appear unfair, but may seem in a way logically dissonant. Why would the state give you a payment only to then ask for some back?
Firstly, the idea of pensioners paying tax is not novel. Many who receive the state pension plus additional income already pay it. Conversely, many who do not get the full state pension and do not get extra income don’t pay tax now and won’t pay it in the future.
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On current projections, this means a tax bill of around £5.25 per month from 2027.
Most people pay income tax at 20 per cent and national insurance (NI) at a rate of 8 per cent when they cross the £12,570 threshold.
This means that if a pensioner and a worker both received £20,000 a year in income, then the worker would take home £17,920, whereas the pensioner would get £18,514.
Finally, it is important to consider why the state pension is going to go over the tax threshold.
This means that in many years since its introduction – in fact more than half the time – the state pension has grown at a faster rate than the earnings of those that are working.
It has come when many of working age are not getting very large pay increases, and many who rely on benefits to get by have seen their payments frozen.
For those that face the prospect of paying tax on their pension, consider the alternative. If the pension growth had been less generous, then the scenario would not be about to arise. Would that really be preferable?
Tax thresholds being frozen affect everyone in society and many people struggling to get by will be feeling the heat in the same – or perhaps even a greater way – than pensioners.
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