Unless you have managed to avoid reading the news for the past three years, you will be aware that since 2022, successive Governments have frozen the level at which you starting paying income tax, and plan to keep it that way until 2028.
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.
The threshold at which tax kicks in – the so-called personal allowance – sits at £12,570, while the higher and additional rate tax thresholds are frozen too.
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.
Unsurprisingly, this is big news that is not welcomed by pensioners.
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.
While for those with large private pensions it is a top-up to their earnings, for those who rely on it, it is often considered a small sum.
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?
But retiree having to pay tax on their state pension does not particularly carry a greater significance than anyone else having to pay more tax as a result of the frozen thresholds.
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.
For those who are ‘dragged’ over the tax threshold, it’s important to understand that what they face is not some sort of cliff edge. They will face a very small tax bill, with only the portion of their income that exceeds the £12,570 allowance charged.
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On current projections, this means a tax bill of around £5.25 per month from 2027.
Secondly, pensioners’ incomes will be among the least impacted by the threshold freezes.
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.
Though separately named, both are for all intents and purposes, two separate income taxes – except those who are at state pension age do not pay NI.
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.
This is before we even get started on the student loan thresholds. Though they have received far less attention in recent years, they are also currently frozen for many graduates, providing another drag on younger workers’ incomes.
Finally, it is important to consider why the state pension is going to go over the tax threshold.
As well as the tax threshold being frozen, the state pension has risen considerably in recent years under the triple lock mechanism, which ensures payments increase by the highest of earnings growth, inflation or 2.5 per cent.
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.
While it would take a cruel person to say that improving the lives of those who rely on the state pension is not a worthwhile endeavour, the context in which this has happened needs to be considered.
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.
We only have to look back to 2023/24. At that time, average pay growth was just 5.5 per cent, but the state pension got an inflationary increase of 10.1 per cent – nearly double what workers were getting.
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?
Ultimately, the state pension climbing above the tax threshold will be emblematic of a society where less and less of our income is ours to keep, but it’s not a plight unique to the over-65s.
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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