Roughly one in five pensioners are set to be ‘dragged’ into paying higher or additional rate tax by the tax year 2027/28 due to the government’s freeze on income tax thresholds, according to new data from HM Revenue and Customs (HMRC).
The information, which was obtained by Quilter via a freedom of information (FOI) request, reveals that 3.1 million people will be drawn into higher income tax rates between the 2022-23 and 2027-28 tax years.
This includes 2.7 million savers aged 60 and over, with nearly half a million entering the additional tax rate: over 1.3 million of those affected are aged 70 or older.
Given that there are 16.8 million people aged 60 and over in the UK, this means nearly one in five will now face higher or additional tax rates – and since not everyone in this age group pays income tax, the proportion of those affected is likely even higher.
Quilter Head of Retirement Policy Jon Greer said: “The number of pensioners likely to pay higher and additional rates of income tax as a result of frozen thresholds is set to increase exponentially by 2028.
“Not only will this boost government coffers by stealth, but it looks likely that other tax increases are on the cards.
“With the Labour government’s first budget now just over two months away, it is vital that people are managing their finances tax efficiently to help reduce their overall burden.
“Those nearing retirement or semi-retired and still working should look to maximise their pension contributions whenever possible.
“They are especially beneficial for higher rate taxpayers, as you can currently receive up to 40% tax relief on your contribution but will often only pay the basic rate of 20% when you withdraw the money in the future.”
For those already withdrawing from pensions, he suggests minimising withdrawals to reduce income tax liability – and notes retirees should account for all taxable pension income, including state pensions.
Source: Cooper, Dan. Money Marketing. August 2024. https://www.moneymarketing.co.uk/news/one-in-five-pensioners-will-be-dragged-into-paying-higher-rate-tax/.
Note:
This information is for education purposes only – it does not constitute financial advice and should not be acted upon without taking professional advice.
How should savers respond?
Despite the coming tax hikes facing savers, pensions remain the most tax-efficient savings vehicle for retirement planning – so it’s crucial to make use of your annual allowances to see the full rewards.
Whether you’re an existing client considering making an additional contribution or would simply like to explore how to make the most of your savings, we’re here to help.
Get in touch today for personalised, professional advice on your retirement strategy.